Fixed vs. Variable Interest Rates: Should You Fix Your Mortgage?

When it comes to choosing a mortgage, one of the key decisions you’ll face is whether to opt for a fixed or variable interest rate. Both options have their pros and cons, and the right choice largely depends on the current economic climate, your financial situation, and your long-term goals. In this post, we’ll break down the differences between fixed and variable interest rates and take a closer look at how South Africa’s interest rates over the past decade can help guide your decision.

Understanding Fixed vs. Variable Interest Rates

1. Fixed Interest Rate: A fixed-rate mortgage locks in your interest rate for a set period, typically ranging from 1 to 5 years. This means your monthly repayments will stay the same during that time, providing stability and predictability.

Pros:

- Consistent monthly repayments, making budgeting easier.

- Protection against interest rate hikes.

Cons:

- You won’t benefit if interest rates drop.

- Fixed rates may initially be higher than variable rates.

2. Variable Interest Rate: With a variable-rate mortgage, your interest rate fluctuates based on the prime lending rate, which is influenced by the South African Reserve Bank’s (SARB) repo rate decisions. While this can mean lower rates when the economy is favorable, it also exposes you to the risk of higher repayments if rates increase.

Pros:

- You could save money when interest rates fall.

- Variable rates are often initially lower than fixed rates.

Cons:

- Uncertainty in repayment amounts as rates fluctuate.

- Potential for significantly higher costs if interest rates rise.

South African Interest Rates: A Decade in Review

South Africa’s interest rate environment has seen notable changes over the past 10 years, with fluctuations largely driven by economic challenges and inflation concerns.

- **2014 to 2018**: South Africa’s interest rates were relatively stable, with the repo rate sitting between 5% and 6.75%. The country experienced moderate inflation during this period, and many homeowners enjoyed the benefits of lower variable rates.

- 2019 to 2020: In 2019, the SARB cut rates slightly as inflation remained under control. However, the COVID-19 pandemic in 2020 prompted drastic rate cuts to support the struggling economy. The repo rate dropped to an all-time low of 3.5%, and homeowners with variable-rate mortgages saw a significant decrease in their monthly repayments.

- 2021 to 2023: Post-pandemic economic recovery, coupled with rising global inflation, led to an increase in interest rates. As of **September 2023**, the repo rate stands at **8.25%**, the highest in nearly two decades. This sharp rise has put pressure on variable-rate borrowers, with monthly repayments increasing substantially over the past year.

Lessons from the Past Decade

Looking at South Africa’s interest rate trends over the past 10 years, we can see how global and local economic conditions have a significant impact on mortgage rates. During times of economic stability or downturns (like the 2015–2019 period and the 2020 pandemic), variable interest rates were highly favorable. However, during periods of inflation and economic tightening, as seen from 2021 onwards, variable rates have risen sharply, leading to higher repayments for borrowers.

Should You Fix Your Mortgage?

Given the current economic climate and the recent rise in interest rates, many South Africans are wondering whether now is the time to fix their mortgage rate. Here are a few considerations:

- Risk Tolerance: If you’re risk-averse and want to protect yourself from further rate increases, fixing your mortgage rate can provide peace of mind. With the repo rate already at 8.25%, locking in a rate now could protect you from any future hikes.

- Long-Term Planning: If you plan to stay in your home for a long period and prefer stability in your financial planning, a fixed rate may be the better choice. It ensures that your monthly repayments remain consistent, regardless of market fluctuations.

- Potential for Rate Drops: While rates are high now, there is always the potential for them to decrease in the future. If you believe that rates may come down in the next few years, sticking with a variable rate could allow you to take advantage of potential savings.

Conclusion

Deciding between a fixed or variable interest rate ultimately depends on your financial goals, risk tolerance, and outlook on the economy. While variable rates can offer flexibility and potential savings when rates are low, they also carry the risk of increased repayments during economic upswings. On the other hand, fixed rates provide stability and protection against rate hikes, but you could miss out on future savings if rates drop.

Considering the recent trend of rising interest rates in South Africa, fixing your mortgage might be a smart move for those looking for security. However, if you’re willing to take on some risk and believe that rates may stabilize or decrease in the coming years, a variable rate may still be worth considering.

At Kirkwood Inc., we specialize in helping our clients navigate complex property decisions, including choosing the right mortgage option. Contact us today to learn how we can assist you with expert advice tailored to your needs.