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Should you fix your interest rate?

by | Feb 1, 2022

Higher interest rates are a certainty this year, so in light of this, would it be wise to fix your interest rate now?

Should you fix your interest rate?The only prediction we can make for 2022 is higher interest rates. Globally inflation is raising its ugly head and news from the US Federal Reserve is that they intend increasing interest rates.

Back home we have already seen an uptick in inflation and our Reserve Bank increased interest rates by 25 basis points in November, and by another 25 basis points at the Monetary Policy Meeting on 27 January, bringing the prime lending rate to 7.5%.

Economists predict that we will see rate hikes at every MPC meeting in 2022 which means the prime lending rate could end the year at 8.25%. The SA Reserve Bank has projected the repo rate (the rate set by the Reserve Bank) to move to 5.75% by the end of 2023 and 6.75% by the end of 2024.

For borrowers, that means by the end of 2023, the prime lending rate would be 9.25% reaching 10.25% by the end of 2024. That is effectively a 40% increase on the current prime rate over the next three years.

The only silver lining is that many economists don’t believe we will see a full 300 basis point increase and that an early move by our Reserve Bank will help contain inflation. Predictions are ranging between 100 basis points to 200 basis points over the next two years, depending on underlying inflation.

Debt will become more expensive

Nevertheless, this still means that all our debt, linked to the prime lending rate, will become more expensive. This usually includes home loans, car finance and credit facilities like credit cards.

Now is not the time to be taking on debt, and one should rather be focusing on paying down debt while rates are still low. If you are thinking of buying a home or a car, make sure you have built these future rates into your affordability assessment.

This raises the question of whether to fix your interest rate.  The problem is that fixed rates are always higher than the current rate, in the same way that a bank offers higher interest on longer-term fixed deposits.

As we are clearly in an increasing interest-rate cycle, banks will already be pricing in rate increases, and this will be reflected in any fixed rate offered.

A fixed rate would be around 200 basis points higher than you would pay for a variable rate. As rates are only expected to rise in increments of 25 basis points, you would be paying a far higher interest rate for the next two years, before the rate cycle caught up.

So, should you fix your interest rate? My advice would be to rather increase your repayments. For example, on a R1 million mortgage, if you increase your repayment by R833 that is equivalent to an increase of  100 basis points. You know you will be able to absorb this year’s rate hikes and that extra payment goes straight to paying off your capital rather than servicing a higher interest rate from day one.

This article first appeared in City Press.

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Maya Fisher-French author of Money Questions Answered

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