Higher interest rates not good for homeowners
The South African Reserve Bank has increased the repo rate by 50 basis points last month, which lead to banks increasing the prime lending rate to 13%.
First National Bank has put together a rate calculation table that indicates how the rate hike affects the monthly repayment amounts on a R300 000, R600 000, R800 000 and R1-million home loan. All loans were calculated with 240 months to pay and were issued at prime with no premium or discount.
On a home loan of R300 000 you would pay R3 408.42 before the rate increase. An increase of R106.31 pushes the monthly repayment up to R3 514.73. A R600 000 loan has seen an increase in repayments of R212.61, going up from R6 816.84 to R7 029.45 per month.
A loan of R800 000 would have a monthly repayment of R9 089.12 before the rate increase and a R9 372.61 after the rate increase. This is an increase of R283.48. And lastly, an R1-million loan had a monthly repayment or R11 361.41 before the rate increase which has now gone up to R11 715.76 – an increase of R354.35 per month.
This interest rate hike has scared away consumers and they are questioning whether they should fix their home loan rate. FNB’s home-loan division advises that there are many different ways to pay off home loans and homeowners can choose the way in which interest is calculated on their bond repayments.
The advantage of a fixed rate is that homeowners are buying certainty in an uncertain interest environment. Homeowners will not benefit on any savings should the interest rate fall, but they can be sure of unchanging monthly repayments for the period of the fixed rate. Variable rate tracks changes in the prime lending rate and homeowners on this option benefit when interest rates are reduced, but have no protection against higher repayments should interest rates increase.
Fixed rates are generally 1% to 2% higher than the prevailing variable interest rate, however, the savings benefit on fixed rates is only evident in the long term.
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