Fixed Interest Rate: 3 Things to Consider
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What to Consider Before Deciding on a Fixed Interest Rate
Many homeowners consider fixing their interest rates too quickly when interest rates climb after prolonged stability. However, this might not be the wisest choice when it comes to saving money in the long run.
How Interest Rates Work
The repo rate (set by the South African Reserve Bank Monetary Policy Committee) indicates the rate at which they loan to commercial banks.
On the other hand, the prime lending rate is the rate at which the banks lend to consumers. When a bank lends money to consumers, they take all the risk, which means that the prime lending rate will therefore always be higher than the repo rate.
Several factors determine the interest rate the bank offers you and are related to your profile as a client. For example, they'll look at your credit rating and affordability.
Fixed Versus Variable Interest Rates
With a variable interest rate, the rate you repay will fluctuate over the term of your home loan, keeping in step with repo rate changes.
A fixed interest rate will be higher than a variable interest rate because it poses more risk for the bank. After up to five years, you will have to renegotiate the rate with the bank.
Top 3 Factors to Consider
If you're a homeowner or on your way to becoming one, here are some factors you should consider before fixing the interest rate on your home loan.
1. Amortisation
This is the total time it will take you to repay your home loan. The longer the period is, the bigger the impact will be on your repayments when there's a change in the interest rate.
2. Cost
While a fixed rate may be less risky for you, it's a more considerable risk for the bank, which means they'll charge you a higher interest rate if you choose to fix it.
3. Timing
The best time to fix your interest rates on your bond is when they're at their lowest, but most homeowners only start thinking about it when interest rates are increasing already.
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Author: Tyson Properties
