Time to Fix Your Interest Rate?

On Thursday the Reserve Bank’s Monetary Policy Committee decided to raise the Repo Rate by 0.25 of a percentage point to 5.57%, taking the Prime Rate to 9.25%. This is the second increase made by the MPC since the beginning of the year.  

FNB Household and Property Sector Analyst, John Loos, predicts “a further mild interest rate hiking to where Prime Rate reaches 9.75% by year-end, and 10.25% by the end of 2015, as the SARB gradually attempts to “normalize” interest rate levels. This, after a long period of ‘abnormally low’ interest rates brought about by an abnormal Global economic ‘crisis’ back around 2008”.

Minimal Impact on Housing at Present

Bruce Swain, MD of Leapfrog Property Group doesn’t believe that the 25 basis point increase will have a significant effect on the property market; “On a R500,000 bond, the repayment would increase by R80 per month. Obviously it would affect all interest bearing debt as well.  As such some belt tightening is to be expected, but we foresee no major impact on house prices or demand”.

While 25 basis points won’t massively affect home owners’ ability to pay their home loans at the moment, any rate hiking cycle does tend to make cause concern for those with mortgages.

Should You Opt for a Fixed Interest Rate?

As with any decision there are pros and cons to fixing the interest rate on your home loan; when rates are high those with lower, fixed interest rates benefit from better cash flow. Conversely the interest rate could be less than the fixed rate, in essence costing the home owner more.

 John Loos believes that “the decision to fix or float should rest on how much certainty one would like over one’s cash flow” whether it be for a year or even five.

“There’s no real way to beat the system when it comes to interest rates”, says Swain, “in fact I agree with Loos that the decision of whether or not to fix interest rates on home loans needs to be based on  a person’s individual circumstances – regardless of what the MPC decides every three months.”

That being said events might force the MPC’s hand causing it to ‘shock’ the public with more drastic increases and so it would be in the best interest of home owners to take stock of their cash flow and to factor in whether they can accommodate any sudden, although unexpected, increases going forward. If not then now is perhaps the time to investigate a fixed interest rate.