With the rand tanking and inflation rising as a result, most economists agree that the Reserve Bank will have to start raising rates sooner rather than later – and probably by more than would otherwise have been expected this year. However, this does not necessarily mean that this is a good time to run to your bank and try to fix the interest rate on your home loan, says Shaun Rademeyer, CEO of BetterLife Home Loans, South Africa’s biggest mortgage originator.
Fixed interest rates
Rademeyer explains that banks in South Africa don’t often quote blanket figures for fixed interest rates. Instead, they usually look at an already approved loan on a case by case basis. “However, most fixed rates are set at 1% to 3% above the current rate, resulting in the borrower paying more than is essential at that time. Most banks won’t fix rates for less than two years”, he says.
For example, on an R800 000 bond taken out over a 20-year period at 9,75% (the current variable home loan rate), the repayment would be R7 588 per month. But if you then managed to fix your rate for, say, two years, you might well have to pay 2% more than the current rate, which would add just over R1000 to your monthly repayment. “Unless you believe that an increase of 2% or more in the variable rate is absolutely imminent, we believe you would be better advised to immediately start paying that R1000 a month (or more) off the capital portion of your loan instead – even if it involves making some lifestyle sacrifices”, explains Rademeyer.
How can this help in the long run?
The reason is that this will give you much greater leeway to afford whatever interest rate rises do end up occurring, he says. “For example, if you are able to pay an extra R1000 a month, even for a year, you will have reduced the outstanding balance of your R800 000 home loan by more than R25 000, thanks to the power of amortisation, and as a result, cut your minimum monthly repayment by more than R250”, explains Rademeyer. “What this means is that even if interest rates did then rise by a total of 2%, the effect on your budget would be much smaller. Your minimum monthly payment would only rise by around R750 and you could still carry on paying R250 a month off the capital.”
Make this work for you
Alternatively, says Rademeyer, since interest rates are set to start rising before then, you should aim to split the additional R1000 a month between the monthly repayment increase and the continued capital reduction. Why? “This will give you the additional satisfaction of seeing your bond repayment term significantly reduced, saving many thousands of Rands in interest. Even at an interest rate of 11,75%, for example, an additional payment of just R250 a month will cut two years off your bond term and save you about R154 000 worth of interest.”
Sage advice indeed and definitely something to consider as a home owner paying off a bond.