You might want to wait before fixing your home loan interest rate

Business Insider SA

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  • Interest rates are at their lowest levels in more than forty years.
  • Homeowners may be tempted to fix rates at these levels - but more cuts could be coming.
  • You also need to find out what your bank will offer: fixed rates are typically higher than the current rates.
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Covid-19 may have brought the South African economy to its knees, but current homeowners, including potential homeowners, have a lot to take advantage of with the latest interest rate cut.  

The South African Reserve Bank announced this year's fourth interest rate last week, and the prime rate is now at 7.25% the lowest rate in more than four decades.

Fixing your home loan at current rates may be tempting, but you may not catch it at its lowest point.

It is for this reason that experts say waiting just a little longer may be worthwhile, as more rate cuts could be on the way.  

"The governor, in his statement… said that they were probably looking at two more cuts this year, but smaller ones. So, we'll probably have lower rates by the end of the year and probably at that point they will remain at low levels for a long time. I don't see rates moving higher anytime soon," said analyst Simon Brown.  

Investment analyst at Mergence Investment Managers Nolwandle Mthombeni also believes that more cuts are coming. This may make the wait more worthwhile.

"[SARB] indicated that they think inflation will stay below the midpoint target until 2020, which means that they will remain low until 2022,"said Mthombeni. She believes now may be a good time to take advantage of the low rates given that rates will possibly go up again.

You first have to confirm with your bank which fixed rate it will offer, and for how long, says Brown. Typically, banks will fix a home-loan rate for a maximum of five years.

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 FNB's Head of Home Finance Mfundo Mabaso.

Also, the longer you want to fix the rate for, the higher the rate on offer will be.

"In an environment where rates are going lower and probably staying low for a long time, if you are going to fix a rate, you want it to be fixed at a really proper level, rather than something that is higher than the current rates," Brown added.  

But fixing your interest rate at 7% would probably be an attractive deal, says Brown. 

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 Head of Customer Delight at Nedbank Home Loans Thozama Mochadibane, 

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".  

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