Rates cycle: let the buyer beware

We began 2016 with the Reserve Bank hiking interest rates by 50 basis points. In March, we had another 25 basis points hike, and, if inflation data is anything to go by, consumers should brace themselves for more interest rate hikes throughout the year.

With the economy in the state it's in, taking on long-term debt such as a vehicle or home loan requires thorough consideration. Many industry experts have warned of tough times ahead, particularly in the housing market, suggesting that those looking to purchase a home or a car should wait out this difficult period before taking on the long-term commitment.

If you are going ahead with buying a car or a home, one of the things you'll have to consider is whether you're going to opt for a fixed or a variable interest rate.

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When playing around with possible loan calculators, you should work with an interest rate above the prime lending rate. The current prime lending rate, now at 10.5%, is the lowest rate at which banks will lend money. The rate you will pay hinges on the outcome of your financial assessment.

If you're buying a car, bear in mind that the interest rate you choose is for the duration of your loan term. When visiting car dealerships, make sure you speak to your salesperson regarding the finance options.

Since the car-repayment period is shorter than that of a home loan, you can opt for a fixed interest rate throughout the repayment period. This will come at a premium.

If you opt for a variable rate, you should leave room in your repayment plan for a 2% to 3% rate fluctuation as a buffer should there be a turbulent economic cycle.

If your finance option includes a balloon payment at the end of the repayment period, this affects your monthly instalments as well. You need to keep this in mind when you're negotiating an interest rate.

When buying a home the considerations are similar, and you're also working with a longer repayment period. During the home-loan application process, your current financial situation will be assessed .

When it comes to settling on a fixed or variable inflation rate on a home loan, you should first consider the current economic situation.

Going with a variable interest rate, particularly during an economic downturn, means that you'll have to factor in the possibility of your monthly instalments fluctuating and possibly being higher than you anticipated.

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With a fixed interest rate, your fixed-rate duration varies between 12 and 36 months. While it'll come at a premium, you are guaranteed a steady monthly instalment for the duration of your fixed-rate agreement.

First-time home buyers might want to work closely with a mortgage originator who will take a detailed look at their financial situation and play around with figures to determine how much, more or less, they should be prepared to budget for.

A mortgage originator can also provide you with a pre-approval certificate, which will help you get an idea of the amount you might be offered. However, you should bear in mind that even with the assistance of a mortgage originator and a pre-approval certificate, your interest rate will only be determined once an offer to purchase has been made along with your loan application.

Before making a final decision, make sure you consider all the costs involved in buying a home, not just bond payments. Monthly costs such as electricity, water, rates and home insurance need to be factored into your affordability calculations.

Your interest rate is only one aspect of the total cost you need to consider. You should think carefully about the other associated costs that come with owning a home, car or any other asset that requires long-term credit, and factor them into your plans.

Email tsamelad@sundaytimes.co.za or find her on Twitter @DeeOnMoneyZA