Good question.

Your decision should be based on two things:
1. the fixed interest rate the bank will offer you, and
2. the term over which you plan to pay off your mortgage.

If you plan to pay your mortgage off in a short period of time (say, less than 5 years), it is probably better NOT to fix your mortgage.

However, if you plan to pay your mortgage off over a longer period of time, it may be better to fix your rate – if the bank offers you a good enough fixed rate.

I doubt very much if interest rates will go down much more. They may remain low for a while still, but I’m quite sure that we’ve reached the turning point in the interest rate cycle.

A variable rate means much less risky to the bank, because they will be guaranteed of a profit, regardless of what the repo rate is.

It’s likely that the bank may also think that interest rates have bottomed out, and therefore, to protect themselves, they may not offer you a very good fixed rate.

I want to buy a house and i’m more worried about the interest rate,if whether i should fix it or link to a repo rate.The thing is that last time an interest rate was 10% or less than that was 1981-01-24.

The short answer is: interest rates are changed to keep inflation at an acceptable level.

To understand the details, read these three posts:
1. The South African Reserve Bank (SARB).
2. What is the Repo Rate?
3. What is the Prime Interest Rate?

In them I explain how the prime interest rate is linked to the repo rate, and why the SARB will hike or lower the repo rate.

I also have a similar question to that of Helina however I would like you to help me understand the main reasons for interest rate movements in South Africa for the past five(5) years,what actually caused them specifically?

What do you mean by “interest rate structure movements”?

I’m not a big fan of most traditional pensions and neither am I a big fan of property. But a lot of that is just my preference.

I think you’ve got some of your estimates and calculations wrong.

Here are some problems with your estimates / calculations:
1. Generating R3k a month rental income from a R300k property is not very realistic. You’d be lucky to get half of that, especially if you take into consideration that some months you may be without tentants.
2. You have not considered general expenses on properties like property tax, maintenance & repairs, management fees and other unplanned fees (e.g. lawyers fees for getting out tenants who don’t pay).
3. You’re projecting that you’ll earn R20k a month from your property in 20 years time, which is all good and well, but the R20k calculated in the retirement calculator is R20k in TODAY’s terms (i.e. ignoring the effects of inflation). Thus, the rent from your property will only be a fraction of that (probably 5% to 10%).
4. Please remember to take into consideration that the interest rates in South Africa are currently at the lowest level they’ve been in about 20 years, that inflation is still hovering around 6% (the upper band for SARB) and that it is likely to increase, especially thanks to ESKOM’s ridiculous tariff hikes. There is a VERY GOOD chance that interest rates will be going up over the next few years.

Other problems with property:
1. It’s highly illiquid. It takes a lot of time to get rid of it if you need to.
2. Properties are expensive. I.e. it is difficult to diversify, because most people will only ever own a handful of properties. If you make one mistake and make a bad buy, it can be game over 1-2-3. With shares, there are no such problems. A few thousand rands can buy you a well diversified portfolio.
3. Again, back to diversification. Because properties are expensive, comparative to most people’s net-worth, by simply owning a house to live in they are already WAY over exposed to property.
4. Property is not a passive investment. It requires a lot more admin and effort than a pension fund / unit trust / plain old shares.

I’m not saying that property is a bad investment. Making a killing from property is possible.

BUT, it will take a lot of hard work, research and dedication.

The same can be said for most other asset classes – if you do the legwork and the research, and actively keep your finger on the ball, you can do very well.

The bottom line is that over the long term property doesn’t really outperform a well-balanced share portfolio.

And if you believe that it really will, then why not rather buy shares in a publicly listed company that owns a lot of property?

In that way you’ll have a liquid investment that you can convert to cash in a few hours, not have to worry about any of the management or hassles, uncooperative tenants, leaking toilets, etc., and you can invest a much smaller amount, keeping your exposure to property to a reasonable level.

My advice for most people would be to simply invest in a passively managed index fund (e.g. the SAFRIX RAFI) and forget about active management or getting involved directly.

If you want to actively manage your investments, then invest in something that you really love and have a passion for and have the time to do it properly.

If that thing is owning and fixing properties, then there you go. If it is not, then do yourself a favor and stay away.

All of what I say here comes from personal experience. I’ve been there and tried it.

What is your take on property versus traditional pensions? This may be simplistic, but let me play out a scenario.

1st I plugged in my age (43) to your retirement calculator, and to realise R20k at age 65 I’d have to contribute R11½k monthly. Let’s assume for some bizarre reason (called Bob) I am only starting my pension contributions at 43! Now R11½K/mth is no mean feat.

If, instead, I bought a flat for rent – say R300k with a rental income of R3k/mth today. All things being equal I’ll have a couple of years of minor shortfall – less than R1k/mth. If the rent increases annually pegged to inflation (say 10%) and the interest does not go completely mad (let’s say I fix it with my bank), then the rent will outstrip monthly expenses (including agents, repairs, etc. in about years 3-4. Thereafter it is profit generating. If I re-invest those profits AND keep up my monthly contribution of say R1k/mth, the flat will be paid off in less than 8 years. It will be generating an income equal to R3k in today’s value – which if you do the progressions will be R6.4k/mth in 8 years or R20.1k/mth in 20 years.

So, do the sums. I will have contributed 3½yrs x 12mths x 1k = R42K (ABSOLUTE MAXIMUM) to realise the same pension that the ‘generous’ pension houses ask me to contribute R11½k/mth towards for the rest of my working life, or in other words R3.3mil.

If I was out in my assumptions by a factor of 10 I would still be 10 times better off!

One more hidden benefit – the bank would even be lending me the money to do this investment. I’d be interested to see any traditional pension that could compete.

I was in a partnership a few years ago when I had to do a very similar calculation, after one of the partners granted a loan to the partnership, at a prime-linked interest rate.

You’re absolutely right, most tools on the net will only allow you to do calculations using a fixed interest rate.

The reason why is that there is no simple way to do such a calculation. The only way is to do many separate calculations.

You start with the loan amount and interest rate 14 years ago. Then you calculate the amount when the interest rate was changed for the first time after that. Then calculate the amount owing when the interest rate was changed again after that.

You repeat this process over and over again, until you get to the current date.

Does this make sense?

P.S. Remember to take into account the correct interest accrual frequency (i.e. is interest added daily, monthly or yearly) when you do your calculations. The interest accrual frequency can make a HUGE difference to the amount owing over a 14 year period.

Thanks.