Should I fix interest rates?

The surprise rise in interest rates last week has brought back to memory a critical consideration for many consumers: Should I fix interest rates.

The answer should depend on the view you take on the future direction of interest rates. Last week increase of 0.5 percentage point in the prime rate from 8.5% to 9% translates to small additional amount to monthly installments towards debt.

But then there is an emerging view that this hike may be the beginning of an upward cycle in interest rates which will translate into significant escalation in monthly installments. No one knows how far high the rates will go. If you think this cycle will end up with a significant rise in interest rates and destabilize your finances it might be worth your while to fix interest rates.

A statement made by Westbank, one of the largest car financiers in the country, is worth noting. The statement attributed to Cyril Zhungu, the General Manager of WesBank’s Motor Division, said interest rates may have just increased 0.5 percentage point, but they remain extremely low, providing a golden opportunity for car buyers to fix the rate on new finance contract and guard against future increases.

“Many South Africans haven’t capitalised on the opportunity, however.  Motorists could have been making cost-effective choices when structuring their finance contracts and winning lots of interest savings in their pockets when opting for fixed rather than linked interest rates.”

While the 0.5% interest rate increase has ruffled consumers back to the realities of their debt, it shouldn’t be considered alarming. For every low, there is a cycle that will invariably end in a high and the past 18 months have been the low of the interest rate cycle.”

Consumers have a very real opportunity to manage their indebtedness and cost-effectively structure finance that elicits savings over the term.”

When considering your monthly mobility budget, there are some areas that remain possible to control. The cost of your vehicle is effectively made up of four key areas: the cost of maintaining it; insurance; fuel; and the actual instalment on the finance contract of the vehicle itself.”

 The statement said a golden opportunity remains for consumers to capitalise on low interest rates by fixing.

“Fixed interest rate deals protect against future interest rate hikes by keeping them at the low levels South Africans are currently spoilt by. Let’s face it: there is an extremely small chance that interest rates can get any lower. This provides some form of security blanket against monthly instalments increasing beyond comfortable affordability levels in the years to come on your finance contract.”

The average price of new vehicles financed through WesBank’s book increased to R246 536 in December. Based on a traditional finance contract of a 10% deposit over 54 months linked to prime, the 0.5% interest increase translates into only a R53.09 increase in instalment. But consider that the saving over the period of the loan is R2 866.46 and the benefits begin to become clearer.”

Consider a more extreme example like that experienced in Turkey, where interest rates have literally doubled from 5% to 10% and the impact becomes more tenable. On a 5% increase in interest rates, our traditional motorist would suddenly experience a monthly instalment increase of R545.90 and be physically spending R29 478.28 more over the period of the contract.”

New vehicle prices are expected to continue increasing, perhaps even more aggressively than consumers have experienced considered the weakness of the Rand. More than 70% of new cars sold locally are imported or assembled from imported parts and therefore are impacted by the weakening Rand. The fuel price should also be expected to continue increasing.”

So if you’re considering buying a new vehicle, take the golden opportunity to contain your monthly mobility expenditure by fixing the interest rate.”

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