Should I Fix The Interest Rate On My Bond?

Should You Fix Your Interest Rate?

Fixing your home loan interest rate certainly does have advantages.

Your monthly bond repayment does not fluctuate with change in the rate of interest.
This will enable you to accurately forecast your future cash flow needs, providing a certainty for establishing costs and budgets. This is also a wise choice to make if you’re unable to afford sudden hikes in the rate that would otherwise affect your bond repayment.

However, if interest rates are expected to fall you would be doing yourself a disservice by entering into a fixed agreement. Being fixed at a higher rate than what the market is currently enjoying will ensure that you will pay more for your home over the long-term.

A variable rate may fluctuate and your associated repayments will adjust accordingly, increasing or decreasing with whatever changes are made to the interest rate.

Before making the decision it is prudent to have some knowledge of the rate expectations for the foreseeable future. If rates are predicted to rise then a fixed rate is clearly the better option. But if the interest rate is expected to drop reasonably fast it would be unwise to become locked into a fixed arrangement. However, a slower fall in the interest rates may prompt you to fix your rate but only for a certain period.

Most banks will not allow you to enjoy the benefit of a reduced interest rate if you have undertaken to fix your rate for a certain period. Nevertheless, you may make a formal request and it is entirely at the bank’s discretion whether or not you will be allowed to revert to a flexible rate. On the other hand, banks are usually willing to allow change to a fixed rate agreement for existing customers who have previously enjoyed a variable rate of interest.

One of South Africa’s primary mortgage providers offers a product called the Varifix Home Loan. Home owners are able to fix their rates for up to 20 years and rest assured that they will never make a higher repayment than what is currently being paid. In addition to this, owners may choose whether to fix their entire home loan or just a portion thereof. The fixed rate is reviewed every 5 years and if market rates have fallen then the home owner’s rate is reset and is fixed at the lower rate of interest. However, in the case of higher interest rates within the market, the home owner can remain assured that his interest rate will never rise above the lowest rate at which his interest was initially set.

In having a fair idea of the expected market changes that would affect interest rates, it is wise to remember that this will always be a volatile environment and not all predictions may come to fruition. But, ultimately, the decision on whether to fix or not to fix is one that will always be based on the individual needs and capabilities of each home owner.
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DISCLAIMER: The information contained in this article is the opinion of the Author and should not be taken as advice. The Author is NOT registered to give any type of Financial Advice and is not associated with a Bank or Finance Company. The information in this article has not been verified and may be inaccurate or incorrect.