So says John Loos, property economist at FNB, who sheds further light on the fixing debate. He says they should be seen as a service provided by banks which enables the client to, for a certain period, shift the cash-flow risk involved with fluctuating rates onto the bank.
“The bank assumes and manages the interest rate risk, and the client obtains certainty over interest rate payment cash flows. In return for this benefit, the customer can expect to pay some price. Should average floating rates over the period in question never rise to the level of the fixed interest rate for the period, then the client may have been better off leaving his/her interest rate to float. This is with hindsight of course, and ignoring the fact that uncertainty can cause stress.
“Conversely, if the SARB shocks us with sharp interest rate hiking, and the average floating rate over the period is significantly higher than the average fixed rate, then the client will thank his lucky stars should he have fixed his interest rate at the beginning of the period.
He says for the more risk-averse person, even should floating rates never rise to an average rate equal to the average fixed rate for a specific period, the fact that this person has cash flow certainty under a fixed rate arrangement for a defined period – be it a year, two years or even 5 years – could allow her to sleep far more peacefully at night.
Conversely, for the more risk-taking individuals, if they like us feel that interest rates may be near the peak of the cycle, they may feel that they are losing out on an opportunity by fixing rates.
He says it is therefore a personal decision, but when considering whether to fix or not, think about the following:
- What is your appetite for risk? Does it cause you major stress? If so, perhaps you lean naturally towards fixing.
- How “close to the edge” are you financially? If your overall financial situation gives you very little leeway to absorb any nasty shocks, you may also lean towards fixing rates.
If you do lean towards fixing, the next question one may well ask is at what time in the cycle would one consider fixing interest rates? Well, typically when the SARB starts hiking its repo rate (i.e. prime rate starts to rise too), banks get a flood of customers interested in fixed interest rates.
“The reality is, though, that this is normally a time when fixed interest rates are relatively unattractive. The reason is that when a client fixes his/her rate, the bank then takes steps to hedge out the risk by doing an interest rate swap in the money market.
“To cut a long story short, this implies that the fixed interest rate offered to the client is determined to a large extent by the rate that the bank can obtain in the money market, and this in turn is determined by what the market expects the South African Reserve Bank (SARB) to do with the repo rate during the period over which the fixed rate is offered.
“So, when the SARB hikes interest rates for the first time in an upward phase, the market normally expects more repo rate hikes to follow shortly (very few interest rate hiking phases don’t involve more than one rate increase), and therefore builds that expectation into the interest rate that it offers the bank wishing to undertake a swap.”
“Therefore, rate fixing is a personal choice for the individual, and I am not advising anyone to fix rates.”
He says what he would suggest is that if one leans towards fixing interest rates, waiting until the time that the SARB starts to hike interest rates, and it always does at some point. It is probably not going to get one a wonderfully attractive fixed rate. Rather, the periods when rates are falling, and market expectation is for more repo rate cuts, are the ones where people often find more attractive fixed rates on offer. Typical to human nature, though, it is at such times that few people are interested.” – Eugene Brink
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Rather try and pay off the loan as soon as possible as nothing beats a Zero payment at Zero rates! – Deon Louw
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