Loan Bank of South Africa journal
Compare fixed and variable interest rates before a long agreement
Many credit agreements, especially home loans and vehicle finance, use a rate that can change during the term. Others offer a rate fixed for a period. For readers in Braamfontein weighing a long agreement, understanding who moves rates, and how often, makes it easier to ask a provider the right questions.
By Loan Bank of South Africa editorial · · 2 min read
Who moves the rates
The South African Reserve Bank's Monetary Policy Committee sets the policy rate, still widely called the repo rate. The committee meets six times a year and the Reserve Bank publishes its decisions on a set schedule, roughly every two months. Its aim is price stability, with an inflation target of 3%, within a tolerance band of one percentage point either side.
When the policy rate changes, other interest rates usually follow quickly. Banks adjust their prime lending rates, and agreements linked to prime move with them. The Reserve Bank notes that a higher rate increases costs for borrowers with floating-rate debt such as home loans.
Fixed and variable in practice
A variable rate means your instalment can rise or fall during the agreement, often in step with prime. A fixed rate means the rate stays the same for the period stated in the contract, so you do not benefit when rates are cut, and you are not exposed to increases during that period either. Ask how the starting fixed rate compares with the variable rate on offer.
Neither choice is automatically better. A fixed rate gives you certainty for a period. A variable rate can cost less when rates fall and more when they rise. What matters is whether the instalment still fits your budget in a less comfortable month.
Ask for a rate-change figure
Ask the provider to show the instalment at the quoted rate and at a rate one percentage point higher. Ask how long any fixed period lasts, what rate applies afterwards and whether there are costs for ending the fixed period early. Keep the answers in writing with the date.
Then compare the higher instalment with your essential expenses. If a single increase would leave no room in the budget, treat that as important information. Loan Bank of South Africa does not offer rates or assess applications; this exercise helps you read any provider's quote more carefully.
Interest-rate checklist
Ask these questions about any agreement longer than a few months.
- Is the rate fixed, variable or fixed for a period only?
- What is the instalment if the rate rises by one percentage point?
- What rate applies when a fixed period ends?
- Are there costs for leaving a fixed rate early?
- Does the higher instalment still fit essential expenses?