Should you fix your home loan rate?

Currently all the talk in South Africa is about your home loan rate, (Prime at 9%) and whether or not you should fix this rate, given that rates could rise by up to 2% in the next 2 years... Moneyweb article

The answer is actually simple - do you think you know more than the economists at the banks, and are you willing to bet on it?  If not, keep your variable rate...

Let me explain.  If you currently have a mortgage at prime less 1.5% (7.5%) variable rate, you will not be able to fix it at 7.5%.  You will be charged up to 2% more for the "privilege" of fixing your rate.

This means that if you are afraid that rates could go up over the next two years, banks offer you the option of paying the higher rate now, to assuage your fears, and remove the uncertainty of having the lower rate for a longer time.

What you should do, if you cannot afford to take a chance that the rates go up by more than 2% in the next two years?  Simple.  Get a quote from your bank at what the payment would be if you fixed your interest rate.  Now pay this amount monthly, without fixing your rate.  You will be building up a nest egg, as you are in effect reducing the outstanding capital faster.  Should the rates go up by less than 2%, you will still keep paying the same amount; the extra amount will just shrink.  If the rates go up by more than 2%, and you cannot afford the new payment, ask your bank to recalculate your loan, using the extra capital to reduce the monthly payment.

Here is an example based on a R1 million loan at prime less 1.5%(7.5%) over 20 years (payment R8055.93 pm).  Fixing the rate at 9.5% will result in a new payment of R9321.31 pm.  Lets assume that the rates go up by 0.5% every six months over the next two years, and you keep the rate variable but pay the new amount.  After two years you will have reduced the outstanding capital by an extra R17749.36, and even if that rate climbs by another 0.5% to 10%, you should still be able to afford the payment after recalculating to factor in the reduced capital (R9354.99).


You only lose if the rates go up by more than about 4% in the next two years.  If the banks' economists thought that a likely outcome, they would have charged you more than 2% extra to fix your rate...