Interest rate hike doesn't mean you should fix your home loan

If the ongoing interest rate hike cycle has not had you considering fixing your home loan interest rate, then today's expected increase may be the one to steer you in that direction.

But don't make the move just yet - in fact, it may not be wise to make it at all.

When the rate started its climb after record lows in 2020, many homeowners started squirming, wondering if they should be fixing their home loan rates to protect against future hikes; the expert advice at the time was 'no'.

Now, however, they are starting to shift their thinking. But what exactly should they be thinking?

Unfortunately, it is not a one-size-fits-all situation as the decision depends on each individual's appetite for risk, says FNB property economist John Loos, who never issues blanket advice on whether it is best to fix rates or keep them flexible.

"You fix your rates to sleep comfortably at night; you fix your rates to have certainty over a portion of your cash flow. And you live with your decision, knowing that you may 'lose' some and you may 'win' some, depending on where interest rates move to in future.

"The main reason for fixing rates is because the future is uncertain."

Interestingly, he adds, even if you are inclined to fix your rates, you should probably expect to find less attractive fixed rates on offer in an interest rate hiking cycle. This is because banks also need to hedge their risks against taking on a client's floating rate, and they do so in the swap market where 'forward rates' and market expectations, to a large extent, determine the fixed rate that a bank can offer.

If the market expects interest rates to increase, as it often does when they are in the process of being hiked, fixed rates offered will often move higher.

"So you get more attractive fixed rates when the interest rates are declining or at least expected to decline."
Loos' "tip" to buyers and homeowners is this: "If you are keen on fixing your rates, the time to look for more attractive fixed rates is often when interest rates are being cut or expected to be cut. Ironically though, this is normally the time when few people are looking to fix their rates."

Echoing this, Carl Coetzee, chief executive of BetterBond says that, unfortunately, there is no simple answer when it comes to evaluating the benefits of a fixed or a variable interest rate that will fluctuate in line with the repo rate.

"Each buyer's financial situation is unique."

"Only once your bond has registered can you apply for a fixed interest rate, and there is a strict time limit attached before the offer lapses."
He says the following factors will help you decide on the most suitable interest rate options for your specific needs:

Understand the repo rate and prime lending rate

The repo rate is set by the Reserve Bank and indicates the rate at which they loan to commercial banks.

"This is not the same as the prime lending rate, which is the rate at which banks lend to consumers. Banks have running costs and other expenses which, when calculated with the risk of loaning money, result in the prime lending rate.

"The interest rate which banks will offer depends on your credit profile - including whether you have maintained regular payments, and affordability."

Currently, the prime lending rate is 10.75%.

Learn more about the difference between the repo rate and prime lending rate here.

Loan term

Coetzee says fixed interest rates are set for up to five years maximum, which means that on a 20-year loan you will need to renegotiate the terms, and these terms could be less favourable than they were before.
"Generally, a fixed interest rate is higher than a variable rate as it poses more of a risk to the bank. It is only negotiated at the time of bond registration and the rate offered is dependent on the going rate at that specific time."

Loan repayment period

The longer the loan repayment or amortisation period, the more influence a change in the interest rate will have on your repayments.

Rates concessions

Remember too, that bond originators can apply to more than one bank on your behalf to secure a lower interest rate, or a rate concession, he says.

"By approaching more than one bank, BetterBond is able to negotiate a better rate concession as the banks compete to offer the best deal based on the buyer's risk profile.
"Banks determine this risk differently, which affects the rates concession each will offer."

As with any financial decision, Careen Mckinon and Kay Geldenhuys of ooba Home Loans say there are benefits and risks to fixing your rates. Households on very tight budgets with little potential income growth could benefit in the long term from fixing their home loan rates, they say in a joint statement.

"And, if you are entering into the market for the first time, the fixing of your rate could be a sensible option as it will provide you with protection from rate increases in the future.

The trick to interest rate fixing is taking the long-term view.

"If you believe that that the interest rate will continue to go up, then it's worth taking the short-term increase for the longer term benefits. Right now we are in an upward interest rate cycle, therefore borrowers should conduct a sensitivity analysis on what interest rate increase they are able to absorb."

To sum it up, Mckinon and Geldenhuys say: "If it will give you peace of mind to be able to budget your repayments at a fixed rate into the future, then it's a good time to fix. On the other hand, if you would like to continue to benefit from the current low rate for as long as possible, and believe that the interest rate might come down in the longer term, then it's best to wait it out, particularly if you are enjoying a very attractive variable rate below the current prime lending rate."