Homeowners shun fixed rates

Despite banks aggressively punting fixed rate options on mortgages, with some even expanding their offering from the standard 12-, 18- and 24-months to five-year periods, the R600bn South African mortgage market has yet to see any meaningful take-up of fixed products.

Less than 5% of banks' total mortgage lending is currently pegged at a fixed rate. And even though economists expect further rate hikes before year-end, most industry commentators don't see any significant increase in fixing over the next few weeks unless banks cut their margins on those products.

Banks' fixed rates are currently sitting at an average 12,5% (1% higher than the current prime rate of 11,5%) depending on the size of the mortgage, the length of the fixed period and the loan-to-value ratio. That compares poorly to a variable rate of around 10%, taking into account that homeowners generally qualify for an average 1,5% discount against prime. Interest rates would therefore have to increase by at least another 2,5% before the average homeowner would benefit by switching to a fixed rate.

Absa is the only bank to date that has taken up the challenge to offer more competitive fixed rates. Absa announced last week that mortgage clients could now peg their interest rate for 12 months at prime (11,5%) if they fix before end-August. Absa is also offering to pay the transfer costs of clients that switch home loans from other banks, sending a clear signal that it's now vying more aggressively than ever to retain its dominant slice of the massive R600bn market.

Gavin Opperman, managing executive at Absa Home Loans, confirms that there hasn't been any rush to date from homeowners to fix rates. Less than 5% of Absa's mortgage book is currently fixed, both in terms of value and number of loans. Opperman says consumers are seemingly adopting a wait-and-see approach. However, he believes that Absa's latest offer to fix at prime could compel more clients to peg their mortgage rates, particularly those with a tight cash flow.

Kevin Penwarden, MD of SA Home Loans - which caused a stir in the market when it introduced a 20-year fixed rate mortgage product in August last year - concedes that the relatively wide margin between fixed and variable rates makes fixing less attractive. For example, SA Home Loans clients who now want to switch to its 20-year Varifix product will have to settle for a rate of just more than 13% compared to its current variable rate of 9,5%.

However, Penwarden says a fixed rate option isn't offered because it's more attractive than the variable rate but merely because it provides certainty of future repayments and a method to manage cash flow.

Says Penwarden: "Nobody can accurately predict future rate movements. So by the time consumers realise that rates are rising, fixed rates no longer look competitive, as they're based on the long-term yield curve and therefore would typically already have factored in any possible further rate hikes."

Penwarden says that earlier this year, when rates were still expected to move sideways, Varifix's then 20-year fixed rate of 11,4% didn't seem that attractive. But those who opted for the product at the time are now sitting pretty, with prime already up one percentage point and more increases possibly to come. – Joan Muller

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