Should you fix your home loan rate right now?

If you're wondering whether now is the right time to fix your home loan interest rate, here's Tommy Nel, FNB Home Loans Head of Credit, with some advice

Economists have hinted that the South African Reserve Bank (Sarb) has reached its interest rate hiking cycle peak, giving hope to those who believe that a rate cut could be on the cards this year.

Given these whispers, you might be a little hesitant about committing to locking down your home loan interest rate, but Nel says it’s actually something that home-owners should be considering.

“Although there’s a good chance that interest rates may have peaked, consumers still need to tread with caution due to possible risks of further downgrades to our sovereign credit ratings,” he says.

“Home-owners may find current fixed interest rates on offer quite generous and it could provide some good protection to borrowers who want peace of mind, knowing that their home loans repayments will remain unchanged for up to five years.”

Nel says that home-owners currently under financial strain should see fixing their interest rate as an effective way of managing your personal cashflow.

READ MORE: The correlation between SA’s junk status rating and your home loan

“When taking up fixed rates, it is important not to try and time or beat the market. It should be more of a risk-based decision to try and protect your home as one of the most important assets you may own,” advises Nel.

The downside of fixing your home loan interest rate, however, is that when the Sarb does eventually drop interest rates. you won’t benefit from the relief.

“However, you shouldn’t beat yourself up about getting such a call wrong if it serves to mitigate the risk of not being able to pay your bond if rates increased,” he says.

Fixing rates may also be ideal for people who own multiple properties and use the stable rates as a strategy to cushion against future hikes, which would severely impact their cash flow.

Given economic uncertainty and unpredictable interest rates, Nel advises consumers who aren’t sure whether to fix rates to rather try and get a favourable interest rate from their bank when applying for a home loan. Here are a few tips that will help you negotiate a better interest rate:

  • Reducing the bank’s risk. Lenders often take a risk-based approach when assessing a home loan application by weighing how much they would lose in the event that a property is foreclosed. Therefore, paying a higher deposit reduces the loan to value ratio (LTV), allowing the bank to offer you a more favourable interest rate, as its risk exposure is reduced.

READ MORE: Home loans: fixed vs linked interest rates

  • Good credit record. It’s something that you’ve probably heard a million times, but Nel says that the impact shouldn’t be underestimated. Optimally managing your financial affairs and making repayments to creditors on time will give you a better credit score and home loan interest rate.
  • Loan term. Opting for a 30-year home loan may result in you paying a lower monthly instalment, but you are also likely to pay 64% more in interest compared to a 20-year term and may also attract a higher home loan interest rate.
  • Extra monthly payments. Paying a bit extra on your home loan every month will not reduce the interest rate, but will help you reduce the principle debt that the interest is calculated on. This would allow you to substantially save on interest payable and reduce the term of your loan considerably. For example, paying R1 000 extra every month on a R500 000 home loan for 20 years at an interest rate of 10.5%, could save you R296 000 in interest payments and reduce your repayment term to 13 years.