The bigger portion of your bond instalments will go to paying back the interest for the loan. Therefore it is important to choose the right type of rate. You can normally choose between a fixed rate or a variable.

 

Fixed mortgages rates:

 

With a fixed mortgage rate your instalments will remain the same, even if the prime rate increases. Often the banks can fix an interest rate just under the current prime rate. You can often choose over what term you want the rate fixed.

Pros:

It will be easy for you to budget your mortgage instalment over the full bond term. Your instalment will not change during the period that you have fixed your rate.This means a fixed rate will protect you when there are upward fluctuations in mortgage interest rates.
Cons:
When originally fixing your interest rate, it’s very likely your fixed rate will be higher than the variable rate the bank would have offered you. So initially your repayments will be higher when you chose a fixed rate, rather than a variable.

Variable mortgage rates:

Pros:

If the interest rate goes up, your bond instalment will not be affected. This means you don’t have to worry about any interest rate hikes.

If the interest rate goes up, your bond instalment will not be affected. This means you don’t have to worry about any interest rate hikes.

If the prime rate goes down, you will not benefit from the downward fluctuation. Your interest rate will remain the same. You might find yourself paying an interest rate that is effectively above the prime rate.

A variable mortgage rate will fluctuate in conjunction with the banks prime lending rate.

Normally you can obtain a variable rate that is below the current prime rate. This means you will benefit by means of the lowest possible instalment at that point in time.

It is advisable to go for a variable mortgage rate when there is a downward fluctuation in the interest rates. When the interest rate goes down, your effective rate will reduce and your bond instalment together with it.

Cons:

If the interest rate increases, so will your effective rate. You might find that you are paying substantially more than when you initiated the loan. This can make it more difficult to budget for your repayments.


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