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Fixed installments ‒ but at what cost?

by | Sep 6, 2023

An offer from your bank of fixed installments on your home loan might seem like great news, but be aware of the costs further down the road.

Fixed installments ‒ but at what cost?Standard Bank announced that it is providing some breathing space for more than 20 000 home loan clients by fixing their installments for nine months. This means that the installment will remain the same, irrespective of any further rate hikes, effective from the rate increase in May 2023 which impacted the installment in June.

According to Thabani Ndwandwe, Chief Risk Officer Standard Bank South Africa, the ongoing interest rate hikes have meant that many home loan customers have monthly mortgage repayments exceeding 40% of their income which is putting them into financial distress.

Standard Bank has automatically fixed the monthly installment for around 20 000 clients identified as vulnerable. Clients who do not want to fix their installment would have to opt out.

With interest rates unlikely to start coming down until toward the end of 2024, many homeowners will view the offer of fixed installments as the relief they are looking for when it comes to their home loan repayments.

Understand the implications of fixed installments

However, the fixed installment comes at a cost. While the installment is fixed, the interest rate is not. That means the installment will not fully cover the interest payments, which in turn will extend the period of the loan.

This is similar to initiatives by Standard Bank and other banks during the Covid crisis. At that time, many customers did not fully understand the implications.

If you feel you do need to make use of the financial relief now, make sure you revert to your regular installments as soon as you possibly can. For example, once rates start to come down, rather than decreasing your installment, keep the repayment the same so that you can shorten the term of the loan.

If you are struggling to make your mortgage repayments, another option that banks can offer is to extend the term of your loan. This lowers your monthly repayments, but also increases the overall interest on the loan.

For example, a R1 million mortgage over 20 years at prime would have an installment of around R10 850 and one would pay a total of R2.6 million over the period. The same loan over a 30-year period would have an installment of R10 090 – just under R800 less – but the total repayment over 30 years would be R3.6 million – R1 million more in interest.

If you do opt to extend your loan period, as soon as you are financially stable or if interest rates decrease, pay in extra to ensure you still pay it off over the 20-year period or less.

This article first appeared in City Press.

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Maya Fisher-French author of Money Questions Answered

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