As interest rates increase, many homeowners are starting to feel the squeeze on their monthly mortgage repayments and are understandably wondering whether or not to fix their mortgage repayments to provide more certainty around what their repayments will be in the future.

The decision will be heavily influenced by the rate at which you can fix mortgage. As Tommy Nel, Head of Credit at FNB Home Loans explains, banks do not fix home loan interest rates based on the current repo rate, but on the market interest rate curves which are constantly changing.  These rates are determined by what the market thinks interest rates will do in the future. “The market interest rates are as dynamic as the share market, meaning that market interest rates rise and fall continuously as new information becomes available to market participants,” explains Nel.

So for example, if inflation figures come in higher than expected, the market may feel that the Reserve Bank will increase interest rates in the near future and therefore price for this accordingly. If economic growth figures come in lower than expected, then the market may feel that the Reserve Bank will cut interest rates to stimulate the economy. So it all depends where we are in the interest rate cycle and what information is available about the economy. If it is expected that rates will increase over the next two to three years then the rate you will pay to fix your mortgage will be higher than the current variable rate.

Nel says the rate at which a bank will fix also depends on the period of time the customer chooses, up to a maximum of five years.

There is a premium for raising funds for the longer periods of time, for example a fixed rate over 60 months will be higher than a fixed rate offered for 12 months.

For example, according to Nel, currently to fix your mortgage rate for 12 months you will pay an additional 0.65% above the variable rate. If your R750 000 mortgage repayment is currently R6 990, that would increase your repayment to R7 312 per month should you fix for a year ‒ that’s an extra R322 per month.

For a two-year fixed mortgage, you would pay an extra 1.1% or a repayment of R7 538 (an extra R548 per month) and for a five-year fixed rate, you would pay 1.75% more, or R7 869 per month (an extra R879 per month).

Rather than fixing your mortgage, another strategy ‒ if your budget allows ‒ is to increase your repayment by 10% each month. This is especially true for anyone purchasing a property now – if you can’t afford to put in extra money each month at this stage, then you would probably not cope with any further rate hikes.

For example, if you currently pay R6 990 a month into your mortgage, increase that to R7 689. This would still be cheaper than a five-year fixed rate and you would be able to absorb a further 1.5% rate hike without it affecting your budget. In this way, rather than paying the money over in interest, you are putting the extra cash into paying off capital until when, or if, rates start to increase.

The downside is if interest rates increase above 1.5% over the next five years. In that case, the fixed rate may have offered a better insurance policy, although not necessarily. Rates increase incrementally and it is very unlikely that this would happen over less than a two-year period. Even if rates are going up, the extra money you pay in each month would already have started to lower your capital value providing you with a financial buffer.

This article first appeared in City Press.