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Fixed or linked interest rate: What should you do with your bond?

When applying for a home loan, you can choose between linked or fixed interest rates. We explain the difference so you can make an informed decision.

Fixed or linked interest rates

Article summary

  • Linked interest rates mean the interest rate fluctuates according to market forces.
  • Fixed interest rates remain the same regardless of market forces.
  • Fixed interest rates allow you to budget with 100% accuracy, while linked interest rates can save you money if the national interest rate drops.

Interest rates are one of the most important factors to take into account when applying for a home loan, and did you know you have two options when it comes to interest rates?

We explain the difference between fixed and linked interest rates so you can make an informed decision when applying for a home loan.

What you need to know about interest rates

The interest rate is what you pay on your home loan in addition to monthly repayments.

Interest rates are affected by:

  • The prime interest rate, which is determined by the South African Reserve Bank.
  • How much of a risk the bank considers you to be, which is determined by such factors as your credit record, your income, and the purchase price of the property.

As such, interest rates can fluctuate over time.

Fixed and linked interest rates explained

  • Fixed interest rates remain the same regardless of the national interest rate. The applicant and the bank agree on the rate.
  • Linked interest rates fluctuate according to the national interest rate.

Pros and cons of a 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.

Pros and cons of linked interest rates

  • 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.

Which should you choose?

It depends on your financial situation.

  • If your budget is tight, you want to be able to plan without worrying about whether repayments will go up due to a rising interest rate. So in this case, fixed interest rates will be the best option.
  • If market conditions suggest interest rates will drop, linked interest rates may be the more appealing option.

The state of the market

You need to keep track of this if you want to make an informed decision.

For example, experts predict that the interest rate will fall in 2024.

Stonehage Fleming senior analyst Jan-Daan van Wyk predicts that interest rates will be lower by the end of the year.

“We believe the SARB will maintain the repo rate at its current restrictive level of 8.25% until after the South African national elections have been held, the Fed has started cutting US interest rates, and some of the fiscal pressures have eased domestically.”

So now is a good time to apply for linked interest rates. But again, things could change, so seek advice on the market before making your choice.

Get the best interest rates on your home loan

Whether you’re applying for fixed or linked interest rates, applying to multiple banks improves your chances of obtaining favourable interest rates on your home loan.

Apply through ooba Home Loans and we’ll submit your application to multiple banks so you can compare the deals they offer and choose the one best suited to your financial situation.

Competition between banks makes it a good time to apply for a home loan, whatever your preference in regard to interest rates.

Get a free home loan comparison.

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