Take advantage of current low interest rates on home loans by considering
fixing your home loan rate for 12 to 24 months.
Experts say interest rates are probably as low as they will get for the moment.
A fixed interest rate on a home loan allows you to `lock in` low rates and
offers you peace of mind when interest rates rise again.
Most of the big banks are offering fixed rates over 12 months and 24
months. Only Standard Bank offers an 18-month period, while First National
Bank (FNB) and the Nedcor Banks - Nedbank, Peoples Bank and Permanent Bank
- are offering a 12-month period only.
Generally the banks differentiate between new loans and existing loans.
You qualify for a new loan if you are buying a home for the first time or
if you have sold your old property and are looking to finance another
property.
It is often a good idea to lock into a fixed rate in the first year or two
after you have bought your first home, especially if you have borrowed to
the maximum that the bank will lend you.
If you already have a home loan and you want a fixed rate, you qualify for
different rates, which are slightly higher than for new loans. (See the
table associated with this article).
You may be tempted to move your bond to a new bank to qualify for the ``new
loan`` rate. But before you do, weigh up the costs of moving the loan - you
will have to cancel your existing bond and register another. This will cost
you about R2 400 for a R150 000 loan and about R3 000 for R250 000 loan.
Fixed rates help you budget properly but there are some disadvantages. At
some banks, for instance, on a fixed rate you cannot make additional
payments over and above your monthly repayment - not even in a lump sum,
for example when you get your bonus.
This means you cannot reduce your loan faster by paying more. However, you
may decide to forfeit the ability to pay extra amounts into your loan for
the term of the fixed rate contract in favour of certainty about your
monthly home loan repayments. You can always pay in more when your fixed
term comes to an end.
Penalties
The other disadvantage of fixed rates is that you will have to pay a
penalty if you want to change the rate before the end of your fixed rate
term.
When you opt for a fixed rate, you sign a contract with the bank. If you
want to get out of your contract (if interest rates come down during the
contract period, for instance), you will have to pay.
At Standard Bank, for example, you are charged a penalty of R1,80 for every
R1 000 of the original loan amount multiplied by each remaining month of
the contract. This means to opt out of a contract on a R250 000 loan that
is due to expire in nine months time, you would be charged R4 050.
Nedcor introduced a penalty fee on February 22 this year. Say you entered
into a fixed home loan contract over 12 months at an interest rate of 13,75
percent on February 25 2000. On March 25 2000, you decide to cancel the
contract. You have 11 months of the 12- month contract remaining and
assuming the capital amount outstanding on this bond is R150 000, the
termination fee would be R1 400.
Some banks offer you the opportunity to move to a replacement fixed rate
without the penalty. You must quiz your bank on these issues and find out
exactly how, if you wanted to, you could get out of a fixed rate contract
and what your options are, before you sign on the dotted line of a contract.
No one can predict with any accuracy how interest rates will move, but most
economists believe that a slow increase is not far off.
Lower interest rates stimulate economic growth, but as the economic
recovery strengthens, the danger is that inflationary pressures will be
re-ignited. Monetary policymakers try to balance the need for economic
growth with the need to keep inflation in check. Raising interest rates is
one way to keep inflation down by dampening demand for goods and services.
Sandra Gordon, chief economist at Nedcor Investment Bank, expects the prime
rate - the overdraft rate the banks offer their best customers - and the
home loan rate to stick at the present level of 14,5 percent until about
January or February next year and to increase gradually after that. She
expects the home loan rate to be 15,5 percent by the end of next year.
Good news is volatility in interest rates - like wild swings from 18,25
percent in May 1998 to 25,5 percent in August 1998 and back down to the
current level of 14,5 percent - should increasingly become a thing of the
past. As the government`s Growth, Employment and Redistribution (Gear) plan
is implemented, Gordon says, foreign investment will be encouraged, not
only in shares and bonds but also in manufacturing.
At a function in Cape Town recently, Tito Mboweni, the Reserve Bank
governor, said the bank had decided to leave interest rates stable with the
repo rate pegged at 11,75 percent.
The repurchase, or repo rate, is one of the rates that banks take into
account when setting interest rates for consumers.
Click here to see the table.