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Fixed or variable interest rate: which suits you?
A variable rate moves up and down as interest rates change, so your instalment can change. A fixed rate stays the same for an agreed period, so your instalment is predictable. Which suits you depends mainly on how much of a rise in your instalment your budget can absorb, and how much flexibility you want.
How each type works
With a variable rate, the interest rate on your bond is linked to a benchmark that changes over time. When rates go down, your instalment falls. When they go up, it rises. Ask your bank which types it offers.
With a fixed rate, the bank agrees to charge the same rate for a set period. Your instalment does not change during that time, even if market rates do. Banks that offer this decide for themselves how long the period can be, and which loan amounts qualify. After the fixed period ends, the loan usually moves to a variable rate or is repriced. Ask exactly what happens.
No one can say reliably where rates will go. A fixed rate is therefore not a bet on the future so much as a way to buy certainty. A variable rate gives you the benefit if rates fall, and the cost if they rise.
When a fixed rate may suit you
- Your budget is tight, and an increase in your instalment would cause real strain.
- You want to know your exact costs for a period, for example while you are saving for something else.
- You value peace of mind over the chance of savings.
When a variable rate may suit you
- You have room in your budget to absorb increases.
- You expect to pay extra into your bond or settle it early, and want the most flexibility. See paying extra into your bond.
- You plan to sell or switch to another bank in the near future.
- You are happy for your instalment to move with the market.
The catches with fixed rates
A fixed rate carries restrictions that are easy to miss. Read the loan agreement for these points:
- The price of certainty. A fixed rate may start higher than a variable rate. You may end up paying more if market rates stay flat or fall.
- Early settlement. The National Credit Act lets you settle a bond at any time. On a large agreement, which includes every home loan, the lender may add an early termination charge. For fixed-rate loans the charge is capped by a prescribed method, and it can be significant. Sell, switch or settle during the fixed period and you might pay it. The exact amount depends on your agreement, so ask for a written figure.
- Extra payments. Some fixed-rate loans limit or charge for paying extra. Ask before you rely on this.
- Switching. If you move your bond to another bank in the fixed period, the charge may apply. See switching your bond to another bank.
If a term is unclear, ask the bank to explain it in plain language, and ask for the answer in writing.
Test your budget either way
The best way to decide is to see how much your instalment could change. Take your loan amount and try different rates in the interest rate change calculator. If a rise of a couple of percentage points would leave you short each month, either choose a cheaper home, a bigger deposit, or a fixed rate. If you can absorb it comfortably, a variable rate keeps your options open.
The bond repayment calculator shows your instalment at any rate you type in. The term of your bond also matters. A longer term lowers the instalment but raises the total interest, as explained in 20-year or 30-year bond.
What to do next
When you apply, ask each bank whether it offers fixed rates and what the terms are. Compare the rate, the fixed period, what happens afterwards and the early termination charge. A bond originator can show you offers from several banks. Once you have your figures, test them in the affordability calculator.
This article is general information for South African readers, not legal, financial or tax advice. Rules and rates change, so check your own situation with an attorney, your bank or a tax practitioner. Our property calculators can help you work out the numbers.