With the 75 basis points increase in the prime lending rate since January this year, and analysts predicting further hikes in the interest rate, many people are asking whether they should fix the interest rate on their bond repayments. As with any financial decision, there are benefits and there are risks.

“There are many benefits to fixing your interest rate, but nothing in life is free, so of course, there are also drawbacks,” says Kay Geldenhuys, the manager of property finance processing at ooba, South Africa’s biggest bond originator. “The most important thing about any financial decision is making sure that you have all the facts before you make your mind up.”

That being the case, Geldenhuys says this is what you need to know about fixing your interest rate.

The argument for fixing your interest rate

The interest rate has a massive effect on the total amount that you end up repaying on your bond. For example, on a R1 000 000 bond, at a 9.25% interest rate, your monthly repayments over 20 years will be R9 158, and the total you’ll pay back will be R 2 198 080

However, if the interest rate is 9.75%, your monthly repayment will be R9 485, and your total repayment over 20 years will be R2 276 440. That’s a total difference of R78 360.  So it’s obvious that even a small shift in the interest rate can end up costing home owners a lot of money.

“Because of this, if market conditions seem to suggest that there will be further interest-rate increases, it starts to make sense to fix your interest rates at the still favourable rate we are enjoying at the moment,” says Geldenhuys.

This also allows you to budget for what is most likely your biggest monthly expense with certainty that it won’t vary over a specific timeframe.  Households on very tight budgets with little potential income growth could benefit in the long term from fixing their home loan rate. And,  if you are entering into the market for the first time, the fixing of your rate could be a sensible option as it will provide you with protection from rate increases in the future.

Banks usually allow a rate to be fixed for a period of between 1 to 5 years after which a new fixed rate can be negotiated. It’s also important to be aware that you can only fix the interest rate on a bond that has already been registered, and that your repayment history must be clean.

The argument against fixing your interest rate

This all sounds very appealing, so why wouldn’t you fix your interest rate, then?

The answer is simple: banks have to hedge their own risk in allowing you to fix your rate, so when they allow you to fix, it will be at a rate higher than the rate you are currently paying.

“If you are currently paying prime minus 1%, your rate might be fixed at prime or even prime plus, which means that you’d be losing out on the benefits until the next rate hike anyway,” says Geldenhuys.

The trick to interest rate fixing, therefore, is taking the long view. If you believe that the interest rate will go up and then continue to go up, then it’s worth taking the short-term increase for the longer-term benefits. Of course, if the interest rate were to go down, those on a fixed rate would miss out on the benefit of the decrease.

“Right now, we are in an upward interest-rate cycle, ,” says Geldenhuys. “Therefore home owners should conduct a sensitivity analysis on what interest-rate increase they are able to absorb. A careful assessment with a professional adviser and the comparison of options will verify if the home owner will benefit from a fixed rate.”

“To sum up, if it will give you peace of mind to be able to budget your repayments at a fixed rate into the future, then it’s a good time to fix,” says Geldenhuys. “On the other hand, if you would like to continue to benefit from the current rate for as long as possible, and believe that the interest rate might come down in the longer term, then it’s best to wait it out.”