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Fixing Your Home Loan

Fixing Your Home Loan - is it wise?

Liquidations are on the increase. Rael Levitt, CEO of the Alliance Group, told CNBC Africa that liquidations are increasing at a massive rate of 46% month on month, with the R 2.5 million to R 5 million housing segment being the hardest hit. The number of liquidations is generally a good indicator of a country’s consumer ability to cope with their debt burdens. And, as the repo continues its steady upward climb, this ability will be increasingly eroded.

But just how high can the repo rate go? Unless you own a crystal ball, this particular question is nearly impossible to answer. There are simply too many influencing factors: both local and international.

For instance, there have been warnings globally that the world is entering a ‘food recession’. Prices of grains and foods derived from grains, in particular, have escalated dramatically right across the world in spite of bumper crops during the previous year. In South Africa, food inflation is presently around 15%.

Another example is the price of crude oil. This commodity has been spiking higher and higher, and the previously preposterous prediction by Goldman Sachs that a spike as high as $200 could be seen, has suddenly become less laughable and more laudable. In South Africa, the price of fuel rose by 8% during March alone.

The third factor that bears a substantial influence is the strength of our currency. It has shown some welcome recovery, but the revelation that our current account deficit is no longer adequately covered by foreign investment could result in some of the recovery being reversed.

These three factors, together with the much maligned 50-odd percent Eskom increase, will probably result in at least one or even two further interest rate hikes over the next 12 months.

The low-down of repo rate prospects

Some economists are quick to point out all of these economically detrimental factors without highlighting that our economy is still showing good growth. Look at the prices fetched by commodities, the positive results announced by most of the listed companies, the growth prospects for our businesses – regardless whether these are listed or not – in South Africa and Africa, and the solid performance of the JSE. The bottom line is that our economy is actually in good shape.

If you measure the good against the bad, it is obvious that the repo rate increases are likely to be temporary in nature. The Reserve Bank is increasing the repo rate now to ensure that the country’s economy does not end up in a downward spiral. Unfortunately this and the positive aspects of our economic situation are rarely communicated in the press.

So, who can blame mortgage paying homeowners from losing confidence and contemplating whether fixing their interest rates would not be better?

The truth of the matter is that there are – broadly speaking – only three scenarios when fixing interest rates could be wise: When you need predictability in terms of repayments, when further interest rate increases will overtake your financial capacity to meet your mortgage repayments, and when you want to capitalise on low interest rate periods.

Repayment predictability

In South Africa the banks do not offer fixed interest rates for the full period of the home loan. The longest fixed term available is offered for ten years by Absa.

But, be careful about going into such a long term fixed interest arrangement right now. The interest rates are high and should there be a recovery over the next eighteen months, you could end up paying a whole lot more than is necessary. Instead, consider opting for an 18 to 24 month fixed interest period. Should the interest rates recover sufficiently after this initial period, you could always enter into a new long term fixed period at the lowered rate.

Financial Capacity

If you are worried that you won’t be able to meet your mortgage repayments should the interest rates increase any further, fixing is a good option. There are two things you would be well advised to do before fixing your rate: The first is to draw up a budget for the next 12 months. Be sure to take into account the impact of rates increases on your non-mortgage interest bearing debt (vehicle finance, credit cards etc.), potential fuel increases and living expense increases. The second is to go and see your mortgage originator. Based on your budget, explain how much you will be able to comfortably afford to pay per month. Of essence is that you do this sooner rather than later.

Capitalise on Low Interest Periods

It goes without saying that the best time to fix interest rates for an extended period is when the repo rate is low. This may not be quite applicable right now, but it certainly will be again in the future: whatever goes up has to come down at some point in time.

A Word of Caution

Fixed interest rates are normally higher than variable interest rates. If your interest rate is more than 1% below prime, and you can comfortably afford an additional 2 to 2.5%, rather ride out the storm as long as you can. Should you convert now, you could end up paying prime or greater than prime on your loan.

The best route to follow

If you are contemplating a fixed interest rate at present, first speak to your mortgage originator. There may be other options available that could help you bridge the gap between what you can afford and what you are required to pay. Your mortgage originator will be able to identify whether the rate on your existing mortgage is sufficiently competitive, whether a longer term may not bring the necessary reprieve and whether switching your mortgage to a fixed interest is appropriate to your personal set of circumstances.

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