Home buyers could be in bondage with fixed rates
If interest rates drop, bondholders should reconsider their mortgage options, writes LUCIENNE FILD
But is it wise to lock yourself into a fixed rate when the interest rate cycle looks set for a downward path?
While bondholders in recent years saw the fixed rate as the only viable option (because rates were on their way up), new home owners should carefully consider whether to opt for the security they offer, or whether to be bold and surf with the variable rate.
And those bondholders emerging from a fixed option will also have to consider whether to renew the option or not.
Most of the economic experts canvassed for this story agree interest rates will have to come down shortly, and the variable interest rate will then be the most beneficial option.
But some say the one-year fixed option may not be such a bad idea.
Wikus Marais, director of Citadel Financial Services, is one of the advisers who says stick with the variable rate rather than the fixed or capped rates.
Fixed interest rates, he says, are no longer attractive, unless you are experiencing cashflow problems and cannot afford the present variable rate of 20%.
But if you do choose the fixed rate, make sure you can switch to the variable option in at least three years time.
"We believe a tighter fiscal policy and a drop in inflation will result in substantially lower interest rates in about three years from now," he says.
Marais does not, however, expect interest rates to drop in the next six months.
The capped interest rate should not even be considered, according to Marais. He says it is usually made use of at the bottom of the interest rate cycle when rates can go only one way - up.
Mathematician and mortgage bond expert Professor Karl Posel says that, as of now, interest rates can only drop - so the variable home loan rate is the most attractive.
Posel says a 2% decrease in interest rates within the next year is essential.
Michiel Bester, an economist with Econometrix, says that while the 12-month fixed interest rate remains attractive at the moment, committing to a fixed rate for longer than that may not secure you the best deal.
Bester predicts the average mortgage rate will drop to and remain at 18.5% for the next 12 months.
And the interest rate will probably average at between 17.25% and 18% over the next two years, he says.
Mathison & Hollidg economist Henry Flint says banks would not have dropped their fixed interest rates had they not been confident of a fall below the rates offered in the fixed options.
Flint says every one agrees interest rates are set to come down - but the question is when.
Interest rates are now being kept high, he says, by the higher-than-expected credit extension figures (private debt). Unless this is curbed, the Reserve Bank will not lower interest rates.
Flint predicts a 1% decrease in interest rates around November or December this year and another two drops of 1% each next year.
Because of the uncertainty about the timing of an interest rate drop, he advises bondholders to lock into fixed interest rates for 12 months. In a year's time your options should then be reconsidered.
Andrew Bradley of Fincorp is pessimistic about interest rates coming down this year, and believes bondholders should go with the one-year fixed option.
He says he would be surprised if the interest rate dropped below 17% in the next year, and in this sense, the current fixed rates are attractive. He predicts a drop of 1% or 2% in the next year.
These are your options:
Variable interest rate
Your monthly repayment will drop and rise in accordance with interest rate fluctuations. This option is chosen by home owners who are optimistic that interest rates will fall.
Fixed interest rate
No matter whether interest rates fall or rise, the fixed rate will apply for the chosen period, and your monthly repayment will remain constant. This facility is used by bondholders who want to guard against interest rate hikes during that time.
Capped interest rate
When a rate is capped a ceiling is placed on the upper limit of any rise in the interest rate.
If the variable rate falls below the capped rate, the lower rate will apply for the period. If the variable rate rises above the capped rate, the rate charged will not be higher than the specified capped rate. This facility is used when there is a possibility that home loan rates may fall, but bondholders want protection in case rates rise. A monthly "insurance" premium is payable on this facility.
The fixed and capped rate options are terminated when the property is sold or when the bond is repaid. If these two options are cancelled by the bondholder before the term has expired, a finance charge is levied.