Should I have a Fixed or Variable Interest Rate for my Home Loan?

Deciding between a fixed or variable interest rate for your home loan gives you the same feeling as your mother-in-law driving down a cliff with your new SUV. You don’t quite know how to feel about it. Each option has its perks and pitfalls, and the decision can have a significant impact on the amount you repay to the bank in the long run. With your bank giving you the option – which is better? Should I fix my home loan or use a variable interest rate?

We’ll start out talking about the repo/prime rate, move on to fixed//variable interest rates and then look at scenarios as to why you want to fix your home loan (or why not).

The South African Reserve Bank (SARB) controls the repo rate. If the banks. need money, they borrow it from the reserve bank at the repo rate.

Banks set the prime rate – It is the repo rate plus a percentage profit. If the bank offers you prime, it means that the bank believes you’re more than able to keep to your agreement in bond repayments. If you get ‘prime plus’, it means they believe you might default. If you get e.g. prime +5%, then you need to do introspection re your finances.

Fixed vs. Variable

If you don’t know what a variable or fixed interest rate is, then this section is for you – and I’ll keep it short. The bank offers the opportunity for you to have a home loan at a fixed rate, pegged down for normally two or three years. The fixed rate is normally a few percent higher than the variable rate. This is to safeguard them in case of a massive fluctuation in interest rates.

With a variable interest rate, the percentage is quoted as prime plus or prime minus. If the SARB decides to change interest rates, then your interest rates will fluctuate accordingly. Let’s look at different aspects of fixed vs variable rates:

AspectFixed Interest RateVariable Interest Rate
StabilityIf you’re looking for predictability and stability in monthly payments – then fixing is for you. It’ll make budgeting easier!This is offered for fixed periods. Once the period is over, it reverts back to variable rates (unless you renegotiate)
RiskShields against sudden interest rate hikes, but may result in higher initial ratesYou’re exposed to market volatility and potential rate increases, but normally have lower initial repayments
DurationThough with a flexi bond, you can pay your home loan off earlier, rate hikes could damage your pocketIt continues for the duration of the loan term, adjusting periodically as the SARB changes interest rates.
CostGenerally, banks do not allow you to pay in extra amounts on your bond – even if you have a flexi bond.If you have an emergency fund and good cash flow in case rates are hiked, then you can take advantage of the variable hikes or lowering of interest rates.
SuitabilityIdeal for borrowers seeking long-term stability and protection against rising ratesIf you have an emergency fund and good cash flow in case rates are hiked, then you can take advantage the variable hikes or lowering of interest rates.

With this in mind, let’s do some examples for each, to see how this will perform in the beginning, during and towards the end of your home loan.

Navigating the Financial Storm: Fixed vs. Variable Scenarios

Imagine you’ve just purchased your dream property for R1 million and are faced with the decision to fix or float your interest rate. Let’s explore three scenarios:

  1. Early in your home loan: In the early years, you’ll be paying off mostly interest. Therefore, any extra payments or lower interest rates have a huge impact on the amount you will repay to the bank. Let’s say you have a fixed rate of 12% and a variable rate of 10%. With a fixed rate, your monthly payment is R11,132, while a variable rate means a slightly lower R9,432. If we say the interest will even out (with the ups and downs), then having a variable rate could save you roughly R 408 000 over 20 years.
  2. Halfway into your bond period: With half of the time having a variable rate, the calculation becomes more complex. Luckily you’re paying off more from your principal, but the compounding of the 10 year ahead is still felt – albeit not as hectic as in the first 10 years.
  3. The last few years of your bond: Towards the end of your bond, you’re paying off your principle, and not as much on your profits. Therefore, the impact of long-term debt isn’t so deeply felt.

Conclusion

So, should you fix your home loan interest rates, or let it float? Well, theoretically it would be beneficial to pay off more on your principal and less interest early on in the home loan. However, we can’t discount the black swan scenarios.

I am aware of people who fixed their home loans at the height of COVID, when interest rates went down to 7-9%. For the next few years, they were conveniently able to repay their properties. However, as of 2024, we can see that the rates are now back to variable – and people are struggling to keep up with their repayments.

It is therefore recommended to fix and let it float with caution – and above all, you need to buy a good deal that is within your budget for the long run. With both fixed and variable rates, it is recommended to have enough cash flow to survive end-of-the-world scenarios.

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