Property Flash


Given that interest rates are unlikely to fall to levels that most home owners can actually stomach, until next year, it’s a good idea to fix the rate on your home loan.

In fact, economists in the US predict that interest rates will likely only fall in the first half of 2023. We can expect a similar pattern globally.

Any buffer against further hikes would help. Just look at how in March 2022, Standard Bank Research said it expected interest rates in South Africa to increase by 100 basis points for the full year. This was then revised up to 175 basis points.

Samuel Seeff, chairman of one of the largest estate agencies in the country, Seeff Property Group, said on Friday that the decision as to whether to fix your interest rate depends on the individual. In his more than 38 years in the industry, interest rates averaged around 12% to 16%.

“At 8.25% and even taking it back to the 10% level where it was prior to the onset of the Covid-19 pandemic is still well below the average,” he said.

Seeff explained that a floating rate is directly linked to the prime or base home loan rate, and adjusts as the repo rate or repurchase rate is adjusted by the South African Reserve Bank.

These adjustments are made in increments which are called basis points. The most recent rate hike was 50 basis points which equates to half a percent.

“When there is an adjustment in the rate, whether up or down, the interest rate on your home loan, and other credit and loans, will adjust accordingly,” said Seeff.

A fixed interest rate is a flat rate which is set for an agreed period of time. If there is an adjustment to the interest rate, the rate on your home loan will not adjust. But it means that should the interest rate drop, you would not benefit from the savings on the lower rate, but you also do not have to pay more should the rate increase.

The key drawback is that a fixed rate is usually set at a few percentage points above the prevailing rate, usually upwards of 2%. In South Africa it can generally only be fixed for three to five years compared with overseas markers where you could fix it for up to 10 to 30 years.

“While it allows you to plan for certainty, it is only for a short period of time and the rate might not reach the amount of your fixed rate which means you are not benefiting if the rate drops,” said Seeff.

Even though many new home buyers in SA have bought without deposits given the financial pressure young South Africans have been under, it actually helps to pay a deposit in the beginning creating a financial buffer. It will reduce the amount that you need to borrow and allow you to accumulate capital value faster.

“You should also aim to put any spare money into your home loan as another way to reduce the repayment period and the interest that you will be paying in the long term. Keeping the repayment steady when the rate drops is one way to build up equity and the sooner you can pay off you home, the higher the capital value and equity that you can accumulate,” said Seef.

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