Fixed vs variable interest rate: Should you fix your mortgage?

Article summary

• A variable interest rate means your home loan interest rate can go up or down depending on the prime market rate, which is determined by the actions of the South African Reserve Bank. A fixed rate means your rate is fixed regardless of market fluctuations.
• Fixed rates are better for people who want to be able to budget with 100% accuracy, while variable rates are for people who are willing to gamble on market forces moving in their favour.
• In 2020, a succession of cuts by the South African Reserve Bank brought interest rates to the lowest level in decades, but now the SARB is gradually raising interest rates to compensate for inflation.

Do you prefer to have everything mapped out exactly when planning your budget, or are you happy to allow a little room for uncertainty, in the hopes that future events will play out to your advantage? This is the choice you face when deciding between a variable or fixed interest rate on your home loan.

Home loan interest rates explained

When you take a home loan from the bank; as well as paying back the loan in installments, you also pay an additional amount in interest. Naturally you want this interest rate to be as low as possible.

Your interest rate is basically determined by how much of a risk the bank considers you to be. Having a good credit record, and putting a large deposit on the property, will lower your interest rate; while a lower credit record and lower deposit (or lack of a deposit, as in the case of the 100% home loan), raises your interest rate.

Employing a home loan comparison service, such as ooba Home Loans, can help lower your interest rates by allowing you to compare deals offered by the various banks.

Variable vs fixed interest rate: Which is in your best interest?

But there’s another factor that affects your interest rates: market forces. As the market interest rate rises and falls, so does your interest rate.

What do you mean by market forces, and how do they affect the interest rate?

1. The SARB (South African Reserve Bank) controls the repo rate (repurchase rate); the interest rate at which SARB lends to South African banks.
2. This in turn determines the prime interest rate; which is the minimum rate at which banks will lend.
3. The prime interest rate will be higher than the repo rate, so banks can make a profit on their loans.
4. When the SARB lowers the interest rate, the banks in turn lower their lending rates, and more people are likely to apply and qualify for loans.

Good to know: As of November 2022, the prime lending rate in South Africa is 10.5%. It was increased by 0.25% in November 2021, another 0.25% in January 2022, and again by the same rate in March 2022.

This increase follows a succession of interest rate cuts in 2020, which brought the interest rate to the lowest it had been in decades. This shows how interest rates can change within a short period.

Variable vs fixed interest rate: Pros & cons

If you’re still unsure, here’s a quick rundown of the pros and cons of each approach.

Variable interest rate

• Pro: If the prime interest rate goes down in response to market forces, the interest on your home loan goes down with it, and you save money.
• Con: On the other hand, if the prime interest rate goes up, so do your repayments. The fluctuating interest rates can make it difficult to budget accordingly.

Fixed interest rate

• Pro: You keep paying the same home loan repayment amount monthly, regardless of fluctuations in the market, for an initial agreed period. You will thus be able to factor your repayments into your budget with 100% accuracy.
• Con: A fixed interest rate may be less of a risk for you, but it’s more of a risk for the bank, so they’re likely to charge you a higher rate out the gate.
• Con: Fixed interest rates expire after the initial agreed period, after which you will either have to revert to variable interest rates, or negotiate a new fixed rate with the bank.
• Con: The option of a fixed interest rate for the initial agreed period is only offered after bond registration, so you cannot factor this into your planning upfront.

So ultimately, the best choice depends on your situation. The fixed interest rate is probably the right choice if:

1. Your budget is tight and you can’t afford any fluctuation in your expenses. You want to be able to plan your budget without worrying about whether home loan repayments will go up due to rising interest rates.
2. Market conditions seem to suggest that interest rates will rise in the near-future, which is the case currently as the SARB looks to compensate for inflation.

Another factor to consider: Each bank offers different interest rates

As well as market forces, your credit record and your deposit; the bank that provides the home loan will play a significant role in determining your interest rate. Whether it’s a variable or fixed interest rate you’re after, some banks will offer better deals than others, as they have different lending policies.

The best thing to do is use a home loan comparison service, such as ooba Home Loans. We apply to multiple banks on your behalf, allowing you to compare the deals offered by the various banks and choose the one with the lowest interest rates.

We also offer a range of tools that can make the home buying process easier.  Start with our Bond Calculator, then use our Bond Indicator to determine what you can afford. Finally, when you’re ready, you can apply for a home loan.