Further interest rate increases are on the cards and if you are planning to
borrow money you should be careful of over-extending your ability to repay
your debts.
You can also lock into a fixed home loan rate to ease the pain of further
interest rate hikes, but you should weigh up the pros and cons before doing
so.
Fixed loan rates up
Banks have already started to adjust their fixed home loan rates on offer
upwards, even though the prime lending rate is expected to move upwards
only at the end of this year.
Matthys Strauss, an economist at Absa, says the banks are expecting an
increase in the prime lending rate, now at 14,5 percent, to 15,5 percent
towards the end of this year or at the latest, at the beginning of next
year.
He expects a further one percentage point increase in the prime lending
rate to 16,5 percent by June or July next year and possibly even a third
hike to 17 or 17,5 percent late next year.
The chief reason an increase or increases are on the cards is the
possibility of increased inflationary pressures on the South African
economy in 2001.
At present, CPIX - which is the consumer price index excluding volatile
mortgage interest rates by which the government sets its inflation targets
- is 7,9 percent. The government has set itself an inflation target of
between three and six percent by 2002.
Consumer spending is expected to pick up significantly towards the end of
the year, which might place upward pressure on inflation.
It can partly be curbed by increasing rates, which puts a dampener on the
demand for goods and services.
Hannalie Crous, director of Standard Bank home loan products, says the
bank`s view is that there may still be a 0,5 percentage point drop in rates
this year, but rates will move upwards after that.
To fix or not to fix
Whether you should opt for a fixed home loan rate rather than a variable
rate, which is linked to the prime rate, depends on the rate you are
currently paying as well as the fixed rate for which you qualify.
You then have to assess where you think rates will be over the period of
your lock-in and consider your ability to repay should rates increase by
three percentage points to 17 percent or 17,5 percent over the next 18
months, as predicted.
Things to consider
When you opt for a fixed home loan rate you can generally choose whether
you want to lock in at the rate for 12 months, 18 months or 24 months. You
will notice from the accompanying table that the rates over 24 months are
higher than for 12 months - this is another indication that banks believe
interest rates will go up.
The major advantage of a fixed rate loan is that you can budget properly
and will not be in for an unexpected shock to your finances. This is
especially important if you are already financially stretched.
On the down side, there may be penalties when trying to exit from a fixed
loan contract.
Also some banks do not allow you to pay in additional amounts into your
bond other than your actual monthly repayment. You should check on these
details with your bank.