Last week’s decision by the South African Reserve Bank to increase the repo rate by 50 basis points has in turn resulted in banks increasing the prime lending rate to 13%.
First National Bank (FNB) has put together a rate calculation table that indicates how the rate hike affects the monthly repayment amounts on a R300 000, R600 000, R800 000 and R1-million home loan.
Loan: R300 000 (100%)
Before rate increase: R3 408,42
After rate increase: R3 514,73
Increase of: R106,31
Loan: R600 000 (100%)
Before rate increase: R6 816,84
After rate increase: R7 029,45
Increase of: R212,61
Loan: R800 000 (100%)
Before rate increase: R9 089,12
After rate increase: R9 372,61
Increase of: R283,48
Loan: R1-million (100%)
Before rate increase: R11 361,41
After rate increase: R11 715,76
Increase of: R354,35
Assumptions:
- This is a new loan with 240 months to pay.
- Loans were issued at prime (no premium or discount).
- No other rate changes will take place during the life of the loan.
This decision by the Reserve Bank has resulted in many consumers questioning whether they should fix their home loan rate.
FNB’s home-loan division recommends: “Just as there are many forms of home loans, there are also many different ways to pay them off. Homeowners can choose the way in which interest is calculated on their bond repayments.
“Firstly, there is the variable rate, which tracks changes in the prime lending rate. Homeowners on this option benefit when interest rates are reduced, but should interest rates increase even further, they will have no protection against higher repayments. The second option is a fixed interest rate.”
The advantage of a fixed rate is that homeowners are buying certainty in an uncertain interest environment. The homeowner can be sure of unchanging monthly repayments for the period of the fixed rate. However, they will not benefit on any savings that may arise should the interest rate fall.
“The fixed-rate option is most beneficial to customers who need to have a more stable monthly cash-flow situation. Customers who have a bit more flexibility and whose monthly budgets can take the brunt of an interest-rate hike may opt to remain on a variable rate.”
While the fixed rate offered will vary in line with a customer’s individual pricing profile, fixed rates are generally 1% to 2% higher than the prevailing variable interest rate. However, the savings benefit on fixed rates is only evident in the long term.
“Each homeowner should carefully assess their appetite for risk, their ability to cope with repayments should interest rates increase, and how they prefer to structure their finances as a whole, before they make a decision,” says FNB.