To fix or not to fix

Consumers and investors may be thinking about fixing the interest rate on their bonds.

Many consumers who took out a bond of R500 000 last year may be struggling to manage the extra R1 226 it is costing them. And, another interest rate hike this year seems possible, following the recently released inflation figures that have exceeded the Reserve Banks 3-6% target range.

Deciding to fix the interest rate on your bond is really a personal decision based on how optimistic you are. If you feel certain that the rates will just continue to increase and that there are no rate cuts in sight, then fixing your interest rate is an option. Bear in mind that fixing the interest rate means you will not pay a higher rate if interest rate increase over the period selected, but you will also not benefit from any interest rate cuts.

The interest rate escalations are the single biggest risk for the investor. South African banks have been poor in offering products to mitigate this risk for the investor but some possibilities do exist, in which the banks use insurance to fix the rate for five years. Remember, paying the premium to fix your rate is simply insurance. Given that you escalate your rental yearly and that you take out any risk of interest rate rises, you can plough the escalation into the bond and accelerate repayment.