Not too late to fix mortgage rate
Posted by propertysouthafrica on November 9, 2007
Many homeowners probably regret not fixing their mortgage rates a year ago when the interest rate cycle started to turn.However, consumers haven’t necessarily missed the boat, despite prime rates already rising from 10,5% to 14% since mid-2006.
Banks have in recent weeks started to price their fixed products very aggressively, with most now offering fixed rates of between 1,5% and 2% below prime. That’s mostly on loans exceeding R500k.
Absa this week lowered the rate on its 10-year fixed option to 2,25% below prime (depending on the size of the loan, the length of the fixed period and the loan-to-value ratio).
That’s in stark contrast to the fixed options traditionally offered by banks. Until recently, homeowners were expected to pay at least 1% more than prime for the privilege of pegging their mortgages rates – irrespective of whether the rate cycle was moving up or down.
Not surprisingly, few South African homeowners have to date rushed to take up fixed products. Less than 5% of South Africa’s total mortgage book of R793bn is believed to be pegged at a fixed rate.
But Absa home loans managing executive, Gavin Opperman, believes that this scenario could change in line with the international trend with fixed rates being the norm rather than the exception.
Opperman expects South African homeowners to start opting for fixed rates now that banks have introduced more competitive pricing. Some mortgage lenders have also expanded their offering from the standard 12, 18 and 24 months to up to 20 years.
Opperman says buy-to-let investors, in particular, could find it increasingly difficult to meet higher mortgage repayments on multiple bonds. He believes it makes sense for overstretched homeowners to switch to a fixed rate contract, particularly given the possibility of more rate hikes to come.
The seven consecutive rate hikes since mid-2006 have already seen monthly mortgage repayments surge by 25%. “Fixed rates are all about peace of mind, as they allow for more accurate financial planning,” says Opperman.
However, the average homeowner’s decision to fix or not to fix will probably be based on the discount that they are already getting on a variable rate and how that compares to the discount now available on a fixed contract. – Joan Muller.
