Fixing interest rates is one way of creating a more stable monthly cash flow and can particularly benefit the affordable housing market.
Fixing interest rates is one way of creating a more stable monthly cash flow and can particularly benefit the affordable housing market.
“Fixing rates is ideal for people entering into the market for the first time and for those buying in the affordable housing range, which is up to R600 000,” says Marius Marais, chief executive officer of FNB Housing Finance.
Marais points out that 96 percent of their market comprise of first-time homeowners.
“Due to affordability issues, these customers generally gear their loan to the maximum in order to purchase an entry level house, which makes them the most vulnerable to changes in the interest rate.”
The recent prime rate of 8.5 percent has been the lowest interest rates have reached in the last 20 years. The highest was 25.5 percent, which was in 1996.
“It seems that we have now entered an upward rate cycle, however, what we can’t tell is how high rates will go and how quickly they will go up,” says Marais.
Fixed rates are generally a few percentage points above the customer’s variable normal bond rate.
Initially, the customer will pay a higher rate, however this will most likely be offset over time as rates increase, says Marais.
On a R500 000 loan, at prime plus 1 percent (10 percent), a customer will be paying R4 825.
At a fixed rate, assuming 2 percent above this, he or she will be paying R5 505, which is R680 more.
However, as the interest rate goes up, this gap will close by R335 for every percentage rate increase. In the last four rates cycles, since 1994, the rates increased on average by four to five percent.
“No one knows exactly what is going to happen with interest rates, and the potential downside is that the rates don’t move up past two percentage points, so it is up to the customer to decide whether or not to fix their rate,” says Marais.
“Fixing rates is ideal for people entering into the market for the first time and for those buying in the affordable housing range, which is up to R600 000,” says Marius Marais, chief executive officer of FNB Housing Finance.
Different banks offer different periods that customers can fix their rates for. FNB Housing Finance offers a five year fixed rate.
If you measure the starting and ending point of cycles, they generally go in four to five year periods, hence our decision to offer a five year fixed rate period.
Usually, five years see an increase in household salary and the customer is in a better cash flow position then when they were new to the market, explains Marais.
Fixing your interest rate is fairly simple, in FNB’s case you can just phone the call centre.
“There are no extra banking fees on a fixed rate option, however, exiting the fixed rate period early will generally cost the customer money because the bank has committed to the fixed rate for the full period of time,” says Marais.
Close to the end of the period the bank will contact the customer who will then opt to either re-fix at the then prevailing rate or will revert to a variable interest rate. The variable rate will be as agreed upfront in the mortgage loan agreement.
“We encourage our Housing Finance customers to fix their rates, 40 percent of our new loans are on a fixed rate basis and we would like to see the whole market moving onto a fixed rate mechanism, which will protect the customer from rate increases in the future,” he adds.
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