Fixed vs Variable
With the present economic climate many are finding their disposable income rapidly depleting. But, is fixing your interest rate the best option?
To fix or not to fix?
"The best candidate for a two-year fixed bond rate is an individual who has absolutely no leeway in their monthly budget. If you have stretched yourself to get your home and can take on no additional expenses, then a two-year fixed rate will at least give you peace of mind that should interest rates go up, your repayments will stay the same" says Leon Barnard, Director of Personal and Business Banking Products at Standard Bank.
"However, if rates decrease, you will not get the benefit of this as your payments will also stay the same. But bear in mind you are not locked into the deal forever, after two years the rate can be renegotiated. A word of caution though – if rates have gone up after the two-year period has expired, you will be exposed to the higher rate which could come as a shock to your wallet."
Barnard says that studies over time have shown that people who were willing to accept a variable rate do better in the long term than those who had fixed rates.
"This, however, has occurred in a low inflation economy where interest rates have come down over the past ten years."
But what can one expect from inflation and interest rates in the coming months?
Taking a step back, Barnard says the key question to ask is whether there will be a declining trend in the production price and consumer price index, leading to a lower interest rate over the next twelve months?
"If the CPI reduces it means that there will be less pressure on the inflation rate, which should in turn lead to lower interest rates. Given the current global financial crisis, the possibility is that inflation will remain high or it could continue to climb, then the interest rates may increase further."
He says the good news is that the petrol price is expected to fall and this will create a better outlook for inflation. But, with inflation figures still creeping up, it is unlikely that there will be a cut in interest rates in the short term. However, he says economists are optimistic that the increase in rates will have the desired effect and expect interest rates to fall by April next year.
"Trying to predict interest rates is no simple task and there is no easy answer as to whether to fix or not to fix. Each individual needs to look at their own personal financial situation and weigh up the pros and cons.
Simply put, long-term variable rates might be better as fixing is a long term commitment, but fixing does allow for better cash management and budgeting, which is crucial to many people's financial security at present."
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