WINDHOEK – Fixed interest rates, especially on home loans, come with their own good and bad, something economists and analysts attempt to explain to ordinary people with little success. But the benefits of fixed interest rates only become more appealing to consumers when interest rates go up, as they recently did. This is because consumers try to avoid sudden increases that come with interest rate rise in house bond financing, but when there are no interest rate increases, consumers do not care about fixed interest rates on home loans, opting to ride the low interest rates wave.
FNB Namibia’s Thomas Slabbert, Head of Home Loans says, “We get more queries from our home owners with regard to fixing their interest rate or not. This is always a bit of a dare, as economists, try as they may, along with anyone else from accountants to weather forecasters, don’t always get future predictions right. There is an uncertainty and no one can say for sure when and by how much it might happen.”
Interest rates in Namibia have increased twice – each time by 0.25 basis points. Though for some people it is a very small increase, it can make the world of difference in terms of finances. “Looking further ahead, there might also be the probability of more increases before the year comes to an end,” says Slabbert.
There was no right or wrong way of fixing rates, Slabbert advises. “Firstly, fixed interest rates exist precisely because of the fact that future moves in interest rates are uncertain. Fixed rates should be viewed as a service provided by banks, which enables the client to, for a certain period, shift the cash-flow risk involved with fluctuating interest rates onto the bank. The bank assumes and manages the interest rate risk, and the client obtains certainty over the interest rate payment portion of their cash flows. In return for this benefit, the customer can expect to pay some price. Should floating rates over the period in question average a rate lower than the level of the fixed interest rate for the period, then the client would have been better off (but only with hindsight of course) leaving his/her interest rate to float.
“While some people may want to use fixed rates to try to ‘beat the market’, my view is that the decision to fix or float should rest on how much certainty one would like over one’s cash flow,” adds Slabbert.
“It was a personal decision and clients should think about their appetite risk and if they are stressed by it, fixing the rate might be an option.
“If, however, the client’s financial situation held a bit of a buffer it might not be necessary. The safest for all clients would be to talk to a home loan consultant, assess your overall finances and then decide what needs to be done,” he says.