Concerned home buyers flock to fixed-rate loans
June 9, 2008
By Ethel Hazelhurst
Johannesburg - Ahead of an expected interest rate hike on Thursday - and probably more to come later in the year - more home buyers are opting for fixed-rate mortgages. Unlike variable-rate mortgages that go up and down with the Reserve Bank's official repo rate, fixed-rate loans remain in place for a period.
Dawid Spangenberg, the head of credit and pricing at First National Bank (FNB) home loans, said it no longer marketed the fixed-rate product.
"We don't have to," he said. "Every time Reserve Bank governor Tito Mboweni makes a statement we get lots of calls."
The number of inquiries is likely to increase this week.
Rian le Roux, the head of economic research at Old Mutual Investment Group South Africa, said: "It is virtually certain that the Reserve Bank will raise rates by 100 basis points on Thursday."
Spangenberg said FNB was revising rates on its fixed-rate products almost daily. And Shaheen Adam, the director of home loan products at Standard Bank, said the rates on offer would be revised this week, following a revision at the end of last month.
While variable rates on mortgage loans depend on the credit profile of the client, the size of the loan and the size of the deposit, the benchmark mortgage rate is currently 15 percent. The monthly repayment on a R500 000 mortgage over 20 years has risen by R1 592 to R6 584 in the two years since rates began to rise.
Jacques du Toit, a property analyst at Absa, explained the implications for borrowers of taking a fixed-rate loan. "If the loan is fixed for one year, the rate will be 15.25 percent and the repayment will be R6 676 - which is R92 a month more than the variable rate."
Du Toit's figures apply to a loan over 20 years, where the loan is worth 80 percent or more of the value of the property.
Rates on fixed-rate loans vary, depending on the term of the loan and the bank's expectations about the course of interest rates. While Standard Bank expects interest rates to continue to rise over two years, Absa and FNB expect the rate to start to decline by the end of the first year and are offering a lower rate over two years.
SA Home Loans was offering a 20-year fixed rate of 17.25 percent, subject to review every six months, said its treasury manager, Matthew Mutch. Only about 1.4 percent of its loan book is on fixed rates.
The major benefit of a fixed rate is certainty over the period of the agreement. But should rates start to fall, borrowers would incur an opportunity cost.
Investec Asset Management bond analyst Mokgatla Madisha warned: "You could end up paying more interest than if you were to ride out the cycle." Trading Agenda, page 14
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