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Home Loan Rates in a Recession

Should you Fix your Home Loan Rate in a Recession?

Let’s just say it: the world economy has entered a period of recession. There should be no more debating the question if and when it’s going to happen, it’s a given. Now people call it the biggest crisis to hit the world since World War 2. We should stop looking for scapegoats, it’s time to take action.

What can you and I do to weather this storm? Just do something. If we all stop working and sit around talking about how bad things are, they will just get worse. Continue to work, as a matter of fact, work harder and smarter than ever before, you want to be the one the company simply can’t afford to do without, should it come to that.

Just how high will our interest rates go? Do you have a crystal ball? Nobody would have predicted that the oil price will drop in price to half of what it was a few months ago. That is a positive for us, you see the sun is still shining out there. The oil price is one of the factors influencing the inflation rate. Food inflation has been a huge concern as well. Economists now predict that the fall in the oil price as well as the good rainy season we had may have a positive impact on food inflation. The rand has weakened considerably over the past few weeks, not so positive.

So, what is Tito Mboweni going to do with the interest rates? Is your crystal ball better than mine?

There are still many positives in our local economy, our banks are strong, thanks to a strict regulatory policy (which we all complained about as well.) The question on the table is whether you should fix your home loan rate now.

You will have to make that decision yourself, there are voices for and against it, so we will provide you with the facts to help you decide.

Abnormally high interest rates are usually only temporary. When you fix your home loan rate you do so to protect yourself against further rate increases. If the rates come down you are locked into that higher rate for the full period for which you have chosen the fixed rate. To start off with, the fixed rate the banks will offer you will always be higher than the fluctuating rate. For you to therefore be better off in the long run, the average fluctuating rate must exceed the fixed rate for the period in question.

If your overall financial situation leaves you no more scope to maneuver, you may want to consider a fixed rate so that you know exactly what you are dealing with. Jacques du Toit from ABSA home loans recently said that he is of the impression that it’s a bit late to fix your bond at the current moment. He feels that rates are at their peak and we can look forward to a downward trend. Trevor Manuel’s message to South Africans on 21 October 2008 was that the financial storm has arrived and is fiercer than anyone could have imagined. However, he said South Africa will ride out the storm due to the pre-emptive action it has already taken. "We can say to our people: our finances are in order, our banks are sound, our investment plans are in place, our course is firmly directed at our long-term growth and development challenges, and we will ride out this storm, on the strength of a vision and a plan of action we share," he said.

How to deal with the situation:

This is not a time to spend, save as much as you can, pay your bonus into your home loan to give you some breathing space.

Hang on to your house for dear life, it is your biggest asset, even more so in falling market situations. Talk to your bank if you are experiencing difficulties.

Start saving, yes, start some kind of savings plan now. We will survive this economic hurricane, but there will be another storm. Saving for a rainy day rings very true all of a sudden.

Budget better, small things all add up—buying lunch every day?—take a lunchbox to work, it can actually be fun!

Discuss your options with a financial consultant before you make a decision to fix your home loan rate.

"Failure is simply the opportunity to begin again, this time more intelligently." -Henry Ford

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