Fixed vs variable interest rates

Variable rates

Most South African home loans have a variable rate quoted as a margin to prime, such as prime minus 0.5%. When the Reserve Bank changes the repo rate, prime and your rate change by the same amount, so your repayment can go up or down several times a year. Over the full life of a loan, variable rates have usually been cheaper because you are not paying the bank to take on the risk of rates rising.

Fixed rates

With a fixed rate, the bank agrees not to change your rate for a period, usually one to five years. Your repayment stays the same however prime moves. In return, the fixed rate is normally set higher than the variable rate you would get on the same day, often by one to two percentage points, because the bank is pricing in possible increases. When the fixed period ends, the loan usually returns to a variable rate unless you fix again.

Comparing the two

How to decide

• Fixing makes most sense when your budget could not survive higher repayments, for example in the first years of a large bond.
• Compare the fixed rate with the variable rate plus the increases you expect over the period. If prime would need to rise more than the gap for fixing to pay off, it is a bet on big increases.
• Read the terms for early settlement and for moving or selling the property during the fixed period.
• Whatever you choose, test your budget at a rate 1 to 2 percentage points higher, so a rise does not catch you out.

Some banks let you fix part of the loan and leave the rest variable, which splits the difference.

Frequently asked questions

Can I fix my rate after the loan is registered?

Many banks allow it, at the fixed rate on offer at that time. Ask your bank for a quote; there may be an admin fee.

Is a fixed rate the same as a fixed repayment?

For the fixed period, yes. Some lenders also offer loans where the instalment is fixed but the term changes; that is a different product, so read the agreement.

Do car loans have fixed rates too?

Yes. Vehicle finance is often offered at either a fixed or a linked rate. The same trade-off applies: certainty against a higher starting rate.

Related calculators