Should you choose a fixed or floating interest rate?

When you take something on credit, whether it is money, a house, or clothes, the lender will charge interest. This is the price you pay for borrowing. Depending on the type of loan you are taking, the creditor will ask you to choose whether you want your interest rate to be fixed or to float.

Justmoney contacted Capitec bank to help you decide which rate is the most suitable for you.

Tip: To get a personal loan at competitive rates, click here.

What is a fixed interest rate?

If the interest on your home loan is fixed it means it is not influenced by the repo rate which is determined by the South African Revenue Services. When the governor changes the repo rate, the interest you pay on your loan will not be affected.                                                                                                                              

What are the advantages?

A fixed interest is a rate that stays the same for the lifespan of a loan or an investment. This means there is no uncertainty, and you always know how much you are paying, allowing you to plan your payments. If your loan term is 12 months, and the interest rate is 15%, you will pay 15% for 12 months.

With a fixed interest rate, you can sleep peacefully knowing that you will not be on the losing side if the market rate rises above the fixed rate. The lender, however, will have nothing to gain as the profit from the loan will be less compared to the interest they are paying to the Reserve Bank.

What are the disadvantages?

Fixed interest rates are known to be higher than the floating interest rate. If the market rate drops below the fixed rate, you will still be paying the same interest rate, not benefitting from the lower market interest rate. The lender, on the other hand, will benefit more from your higher payments.

READ MORE: Should you fix your home loan interest rate?

Another disadvantage of fixed interest rates is that they’re offered for a short period.  After 60 months your lender will change your interest rates to floating rates.

However, you can still negotiate a new, fixed rate with your lender.  Banks limit the term so that they can adjust interest if the repo rate is changing at a faster rate than originally estimated.

What are floating interest rates?

If the interest on your loan is floating, it means that it is influenced by the repo rate. When the repo rate increases, your interest will increase. If it decreases, your interest will decrease.

What are the advantages?

Floating interest rates can be less expensive – especially for long term loans, such as home loans. This is because lenders charge higher fixed rates for loans longer than 60 months to cover the costs that may be incurred in the long run; for instance, when the market rate increases.

If the market rate decreases, the interest on your loan will also decrease.

What are the disadvantages?

When you choose to take your loan at floating interest rates, you are taking a risk. If the market rate increases, your interest rate will increase. If the market rate increases twice a year, your interest rate will also increase twice.

It’s not easy to plan your payments due to the unpredictability of the rates. What you pay today may not necessarily be what you pay tomorrow.

Which rates are the best?

Both rates can be beneficial depending on the circumstances. Fixed rates are preferable for people with stable but tight incomes who take out long-term loans. They provide the assurance that you would pay the exact same amount of interest every month.

Floating rates are usually lower than fixed rates. They tend to be more preferable for people who are able to take risks with their money as the rate is dependent on the market.

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