Factors to consider before fixing

If, every time the Monetary Policy Committee meets, you feel anxious, stressed and you hope that your disposable income will not be reduced overnight by some arbitrary decision made by the powers that be, who believe that you are over spending and the only way to curb this unruly behaviour is to further increasing your monthly expenses, the thought of fixing your interest rate has probably crossed you mind. It is a difficult decision with no right or wrong answers. Your individual financial position will determine the route you should take.

If you are currently enjoying a discounted rate, understand that this is not the rate at which the bank will fix your interest. The fixed rates quoted by the banks are determined by the size of your loan, the percentage loan to the value of your property and the length of the fixed rate period (12,18, 24 or 60 months, with some banks fixing rates up to 10 years). Fixed rates are often higher than discounted rates, except where banks expect a decrease in repo rates in the near future or in long-term fixed rate options. Normally, the longer the term of your fixed rate, the lower the rate. However, the bank will charge the client a penalty fee, if the client cancels the loan or changes the interest rate option within the fixed rate term.

Before considering whether or not to fix your interest rate, first establish the fixed rate you qualify for. Compare this with the current interest rate you are enjoying. Looking at the economic trends over the last 6 months, establish how often the repo rate will have to increase before you start to gain the benefit of fixing your rate. For example, if you are currently enjoy an interest rate of prime less 2%, effectively 12% and the bank quoted a fixed rate of 13%, the repo rate will have to increase by more than basis points before it becomes beneficial for you to fix your rate.

It is a good idea to monitor the fixed rates offered by a specific bank over a specific period. If the rates are increasing, then probably the bank has a fair premonition that the repo rates are on the increase as well. If the fixed rates over a period start to decrease, this is a good indication that the banks envision a decrease in repo rate. Follow this trend!

So who should consider fixing? On a 0.5% interest rate increase, you will pay an additional interest of R41.70 for every R100 000 loan amount. If you are earning a fixed income or are working within a tight budget where another increase in interest rate will negatively impact your financial well-being, then fixing your rate is not an option, but a necessity. If after careful consideration you feel that you stand to gain by fixing you interest rate, then it is a viable option.

The sad truth is that no matter how effective you are in determining the best way forward, there are no guarantees. Interest rates are an aspect of our lives we truly have no control over, we can just minimize their impact.