Interest rates are rising – should you fix your bond?
With interest rates rising for the third – and likely not the last – consecutive time last month in March, it’s no surprise that many South African homeowners are looking for creative ways to minimize the impact on their bond redemptions.
The option of negotiating a fixed interest rate (rather than tied to prime) can be tempting at times like these. However, homeowners should think carefully before going down this potentially costly route.
It is true that costs will rise for owners over the next few years. Rising oil, fuel and electricity prices are putting strong pressure on inflation, and the cost of living will hit harder than usual.
When it comes to the interest rate, however, there is no need to panic, as future increases are unlikely to be as high or as rapid as many fear.
Raising interest rates is the Sarb’s main method of containing rising inflation, but inflation is not the only economic drag they are juggling at the moment. The pandemic has left our economy in crisis and reviving growth is of utmost importance.
Raising interest rates too high, too quickly, would be detrimental to this objective. A slow, steady increase to moderate – not extreme – levels is much more likely.
With this in mind, setting interest rates is unlikely to have the cost-saving effect homeowners are hoping for.
Fixed interest rates are always higher than prime rates. This difference is not negligible either – it is often around 2%. Since the prime rate is very unlikely to increase more than 2% over the next two years, all you’d get out of fixing your bond rate now would be to bring those increased expenses up front and pay them for longer. than necessary.
Fixed interest rates can be advantageous in certain circumstances where reliability and predictability are more valuable than overall cost.
When affordability is your ultimate goal, however, fixed interest rates are almost never the solution.
Ultimately, your lender must make some profit on your bond. They are not going to offer you a fixed rate without creating enough of a buffer to overcome any foreseeable increase in interest rates. The only way to win with a fixed bond is if you can predict the market more accurately than your lender. Not very likely given the in-house knowledge and extraordinary expertise they have in their team.
Instead of trying to dodge future interest rate hikes, homeowners could start planning now to ensure they can meet the expected rise in costs.
Current worst-case estimates suggest the prime rate will reach 8.25% by the end of this year, 9.25% by the end of next year and 10.25% by the end of of 2024.
It’s a good idea to run these numbers through your favorite online bond calculator to see exactly what they do to your repayments.
If affordability is likely to become an issue, approach your lender sooner rather than later: not to fix your interest rate, but rather to discuss the full range of alternative options available to you.
It is in your lender’s interest to help you overcome temporary financial difficulties. This includes affordability issues caused by interest rate increases. When savvy enough, lenders are almost always willing to reach a mutually beneficial compromise that will allow you to continue to manage your obligation – and keep your property – while you find your financial means.
Roger Lotz is a franchisee for Rawson Properties Helderberg.