Should you fix the rate on your home loan through these times in South Africa?

Every person has different circumstances and their financial situation is unique. There is no one simple answer to fixing your interest rate on your home loan. There are some important factors that should be considered. 

The prime lending rate in South Africa was at 10% at the beginning of 2020, and is now sitting at 7.25% which makes it cheaper to pay off your bond.

The repo rate is set by the South African Reserve Bank Monetary Policy Committee who then indicates the rate at which they should loan money to the commercial banks. The prime lending rate is the rate or percentage at which the banks lend to us as consumers. 

The prime lending rate and the repo rate are not the same. Banks have running costs, overheads and they are the ones that take the risk of loaning the money to you which has to be built into their pricing fee.

The interest rate that is offered to you is determined by many factors. The main factors are your credit standing and your affordability. Your credit profile is determined by how responsible you are with your finances and how you conduct your finances.

The bank then calculates the interest rate according to your credit profile and will determine the monthly repayments. 

A variable interest rate means that the rate that you need to pay will fluctuate over the term of your home loan which will be in line with the repo rate. Usually, a fixed interest rate is higher than a variable interest rate because it is more of a risk for the bank. Usually, a fixed interest rate is set for a period of up to 5 years whereby it is then renegotiated.

There are three factors that need to be considered when fixing your interest rate or not:

  1. Look at market conditions at the time of securing your loan.
  2. Loan term. Fixing your interest rate is usually up to 5 years. If your home loan spans over 20 years, then you will need to renegotiate the terms which could leave you in a less favorable situation than before.
  3. The amortisation period is the total length of time that it takes for you to pay off a loan. The longer the amortisation period, the larger the influence of a change the interest rate will have on your repayments.
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