To fix or not to

To fix or not to fix is the question on everyone's minds as they face the onslaught of spiralling inflation and brace themselves for another rate hike this week.

To fix or not to fix is the question on everyone's minds as they face the onslaught of spiralling inflation and brace themselves for another rate hike this week.

There is no doubt that a fixed rate provides certainty if you can't afford a sudden change in monthly repayments brought about by a hike in the variable rate.

A fixed rate offers relief for people facing severe cash-flow problems owing to sky-high mortgage obligations.

But there are downsides to fixing mortgage rates, says Mokgatla Madisha, bond analyst at Investec asset management.

He says the decision should depend on how much higher interest rates will go and how long they remain high. Fixing a home loan now might be costly because you might end up paying more interest than if you were to ride out the cycle.

Madisha says this is particularly so because of Reserve Bank governor Tito Mboweni's promise to deal with rampant inflation aggressively.

He believes that the higher rates rise now, the quicker they are likely to fall.

He says fixing your rate for two years, for instance, could mean that you are stuck paying off your mortgage at 16percent in 2010 when inflation could have fallen back to 6percent and rates have been reduced to 12 percent.

He gives the example of a person with a R1million bond, currently paying back R11715 a month at prime minus 2percent. This homeowner decides to ride out the interest-rate cycle.

"Say rates were hiked by 1 percent at each MPC meeting in June, August and October and then stay on hold until next May."

Madisha says it would take the prime rate up from 15 percent to 18percent and the repayments up to R13912 a month.

Another person decides to fix the home loan at prime plus 1percent now. The monthly repayment would spike to R13912 a month immediately.

This homeowner will have to cough up every month what the other one will only start paying in October, when interest rates have risen another 3percent.

"Over a year the second homeowner would pay about R6000 more," Madisha says.

Investec does not foresee another 300 basis points in rate hikes, but anticipates a further 1percent to 1,5 percent hike until the cycle peaks.

This means homeowners on fixed rates are worse off because they could be stuck for a year at the fixed rate, while those on a floating rate can start enjoying the respite of lower interest rates, Madisha says.

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