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To fix or not to fix

13 October 2004 angelo coppola

John Loos, economist of the Absa Group, says interest rates could remain unchanged until mid-2006, although further minor reductions cannot be ruled out.

This reflects the stable inflation environment that has been brought about by a strong rand, low global and domestic food price inflation, and inflation expectations that have been declining for some time.

But, warns Loos, for as long as the rand remains a volatile currency capable of large unexpected shocks and global oil prices run the risk of spikes due to geopolitical risks in Nigeria, Venezuela and the Middle East, there is always a possibility of interest rake hikes.

He says households should always be mindful of such unexpected possibilities in their financial planning.

The exchange rate of the rand and the international oil price could therefore be key factors in home owners’ decision whether to fix or not to fix their home loan rate.

Rachel Wall, GM for Absa Home Loans, says home owners should carefully consider the various rate options available to them.

“Each option has its advantages and disadvantages, and there are a number of factors that should be taken into account, most importantly the individuals view on interest rates and their own personal financial position,” says Wall.

The fixed rates currently on offer are higher than the prevailing variable rate and clients should therefore consider what rates would be doing in the longer term before deciding to fix.

Of course, a fixed rate would only be considered if it is cheaper over the long term – i.e. if the fixed rate is on average lower over the long term than the variable rate which follows prime.

Wall warns against overextending while rates are still low. She advises clients to “carefully evaluate their ability to meet home loan repayments if they expect interest rates will increase in future, Fixed rates have the benefit of allowing for better longer term budgeting and cash flow management."

Fixed rates protect customers from fluctuations in the variable rate and therefore have certainty regarding their repayments. Clients, who are concerned about their monthly cash flow and would prefer the certainty of a steady monthly repayment, will find the fixed rate option attractive.

But, warns Wall, “the fixed rate option entails the signing of a legal contract that ties the client in for the fixed rate period.”

A variable rate is definitely the best option in a market where rates are stable or are on their way down and can also be considered when volatibility is of a short term nature.

If a client is planning on buying a house for speculation purposes (i.e. unlikely to have it for longer than a year, a variable rate is the best option, since the other rate options have contracted periods – usually longer than a year.

Quick Polls

QUESTION

As National Treasury mulls a two-bucket retirement system, mandatory contributions and preservation, regulation 28 is being amended to allow up to 40% of retirement fund assets to be invested in SA-based infrastructure… Which of the following retirement fund ‘tweaks’ would you consider most beneficial to your clients?

ANSWER

Give fund members emergency access to retirement savings
Let fund members invest 40% in infrastructure
Let fund members invest 40% offshore
Mandatory preservation when resigning from a fund
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