A leading home loans company will be launching a capped interest rate facility for your home loan, but the way in which you pay for the privilege of capping your rate could cost you more in the long run.
Integer announced last week that on August 1 it will launch InterCap, a capped interest rate facility adjunct to its existing home loan offering, in response to consumer concerns over increasing interest rates and inflation.
Simon Stockley, the chief executive of Integer, says the advantage of capping your home loan interest rate, as opposed to fixing it, is that if interest rates fall, you are not locked into a higher interest rate.
InterCap allows you to choose the level at which you want to cap your rate - either at the current prime rate (15.5 percent) or at higher rates of up to 1.5 percentage points above prime (17 percent). Capping at prime will cost you more than if you cap at higher than prime.
In addition, you can choose the duration of the cap - from one year to two or three years. And you can choose whether to cap the interest rate charged on the full bond or you can choose to cap the interest rate on, for example, only half of your mortgage bond amount.
Most banks offer you the option of fixing the interest rate on your home loan as a means of protecting yourself from further interest rate hikes.
However, if you fix your interest rate, you will usually have to do so at a rate that is about two percentage points above the prime rate.
You could end up in a situation where, after having fixed your interest rate, the prime rate falls and you are stuck paying a higher interest rate on your home loan.
A capped interest rate is a mechanism that allows you to reap the benefits of falling interest rates but protects you from increases to your interest rate beyond a certain level, which could be as low as the current prime interest rate.
Stockley says if you are a homeowner who is concerned about further interest rate increases, you should give serious consideration to capping your interest rate or buying interest rate protection.
However, the offer is available only to Integer home loan clients.
Stockley says the company is investigating the viability of introducing a five-year capped rate.
Since Integer was launched in October last year, the company's home loan book has grown rapidly and, Stockley says, it is approaching the R500-million mark.
Although Standard Bank did offer a capped rate to homeowners at one time, the bank says it withdrew the product from the market due to a lack of interest.
Leon Barnard, the director of products for Standard Bank's personal and business banking division, says the bank is monitoring customers' appetite for a capped interest rate and will consider re-launching the product "if necessary".
Luthando Vutula, the managing executive of Absa's home loans division, says the bank does not offer capped interest rates.
Nedbank indicated to Personal Finance it would consider launching a capped rate option in order to remain competitive in the market for home loans.
What it will cost you
Simon Stockley says the actual cost of capping your interest rate is determined at the time you choose to cap your rate and is a function of the yield curve at the time.
You can choose to pay the costs upfront or you can have the costs amortised over a longer period of time, or even for the remaining duration of your bond.
For example, if you have a mortgage bond of R700 000 and you capped the interest rate at prime (15.5 percent) over one year, it would currently cost you R8 062 as a cash, upfront fee.
If you chose to amortise the costs over:
- Five years, it would cost you R191.47 extra a month, which would add up to a total cost of R11 487.96 and would cost you an additional R3 425.96 in interest;
- 10 years, it would cost you R130.86 extra a month, which would add up to a total cost of R15 703.74 and would cost you an additional R7 641.74 in interest;
- 15 years, it would cost you R114.14 extra a month, which would add up to a total cost of R20 544.64 and would cost you an additional R12 842.64 in interest; or
- 20 years, it would cost you R107.76 extra a month over the entire duration of your mortgage bond. It would cost you R25 862.21 in total repayments, with a further R17 800.21 in interest.
If interest rates rose by 50 basis points to 16 percent and you had not capped your home loan interest rate, your home loan repayment would increase by R261.63. So, on a short-term basis, you could save up to R153.87 a month by capping your rate.
However, on a long-term basis, you will end up forking out a large amount of money and paying additional interest on your mortgage bond in order to cap the interest rate on your home loan for just one year.