The interest rate party may be over. Here’s what you should know about fixing your home loan.
- The Reserve Bank has indicated that no more interest rate cuts are on the cards – and its models predict two hikes in the last half of 2021.
- For mortgage holders, now could be a good time to consider fixing rates.
- But the terms may not be as good as you'd expect.
- And there is a "risk" of another rate cut before the end of the year.
- For more articles, go to www.BusinessInsider.co.za.
The interest-rate party may be over, SA's Monetary Policy Committee (MPC) indicated on Wednesday.
It kept the repo rate unchanged at 3.5%, and governor Lesetja Kganyago said the Reserve Bank's models do not make provision for further cuts in the near term. Instead there are two rate increases on the horizon, in the third and fourth quarters of 2021.
The economy suffered by more than expected in the second quarter, and the bank now expects the GDP to shrink by 8.2% this year – from its previous forecast of 7.3%. But the MPC expects inflation will remain in check for at least 2021 and 2022.
It also indicated that it can’t do much more to help prop up the economy.
“Monetary policy … cannot on its own improve the potential growth rate of the economy or reduce fiscal risks,” Kganyago says. “These should be addressed by implementing prudent macroeconomic policies and structural reforms that lower costs generally, and increase investment opportunities, potential growth and job creation.”
South African interest rates have already been cut by 300 basis points since the start of the year – much more than the median cut of 100 basis points in other emerging markets.
The cuts this year have already meant a steep decline in bond repayments. On a new mortgage of R2 million at the prime rate, you will now pay around R3,800 a month less than at the start of the year.
Given that rates seem to be headed higher, you may be tempted to fix your home loan rate.
Here’s what to keep in mind.
You will probably have to fix your home-loan rate at a higher number than you would expect
You first have to confirm with your bank which fixed rate it will offer, and for how long, says Simon Brown, analyst and founder of the financial education platform Just One Lap.
The fixed rate they will offer is usually higher than the current floating rate, he adds.
"Fixed rates offered by the bank vary on a regular basis, and depend on a number of factors, including the outlook of the bank on the future movement of interest rates. Customers, therefore, cannot choose which rate to fix at, but can ask to be quoted on the rates available at any given time, and select whether to fix at the offered rate then, or not," says First National Bank's head of home finance Mfundo Mabaso.
You won’t be able to fix it for the rest of your home-loan term
Typically, banks will fix a home-loan rate for a maximum of five years.
The longer you want to fix the rate for, the higher the rate on offer will be.
There is a “risk” of at least one more rate cut
The big benefit of a fixed rate mortgage is the certainty it brings, as this kind of payment is usually the biggest monthly cost in most households," according to Thozama Mochadibane, head of customer delight at Nedbank Home Loans,
The downside, however, according to Mochadibane, is that "locking yourself into a fixed rate for say three years, is that there is a chance that interest rates could remain low or fall even further over that time, leaving you paying more than you otherwise would have".
While Kganyago indicated that no more rate cuts are planned, two out of the five monetary policy committee members still voted for a rate cut of 25 basis points.
It was a close call says, FNB chief economist Mamello Matikinca-Ngwenya. She believes that there is still scope for another 25 basis points of cuts before year-end.
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