The interest rate on a credit facility forms part of the Lender’s profit and benefit, and is therefore structured to achieve that end. With regards to Home Loans, there are two types of rate of interest structures which an applicant may choose to apply on their loan.

Variable Rate of Interest

In this structure, the interest rate is linked to the Prime Lending Rate, which in turn is influenced by the Repo Rate. Depending on the creditworthiness of the applicant, the interest rate on a Home Loan is measured as prime plus (above) or prime minus (below) the Prime Lending Rate which is a fixed percentage (currently at 7 percent).

Credit facilities with variable interest rates offer lesser risk to the lender of the Home Loan in that the interest is determined by market forces and therefore fluctuates to factor in any economic pressures. In this regard, variable interest rates are usually and generally lower as compared to Fixed Interest Rates, sometimes with 2 percent or more. Since the Variable Rate of Interest is dependent on the creditworthiness of the consumer, the interest rate may even be lower than the Prime Lending Rate (7 percent currently).

Fixed Rate of Interest

Some Home Loan applicants prefer knowing exactly how much their repayment instalments will be, regardless of the market influenced Repo Rates and Prime Lending Rates. The Fixed Rate of Interest on a Home Loan has the effect that the interest remains the same for a specific period of time, usually up to 5 years.

This has the ultimate benefit of certainty in knowing that despite any market pressures the amount remains the same. This can also be of benefit for those who can study and predict economic outlook in the future, where they can save should the Prime Lending Rate be increased to levels higher than the Fixed Rate of Interest.

The accompanying disadvantages with Fixed Interest Rates are that they are generally set higher than Prime Lending Rates firstly, and that they are set for a short fixed period of up to 5 years. This is done mainly to protect the interests of the lender in the event the market subsides or if there was a miscalculation on the projections of the pace in market fluctuations, and cater for where there is need to increase the rates and stay in business.

This then means if the Prime Rate does not increase during the period of fixed rate (during the 5 years), there is no financial benefit to the person who holds the bond. After the 5 years the bondholder’s credit facility is reverted to Prime Lending Rates or a new Fixed Rate Structure may be negotiated.

Phoenix Group - Specialist Bond Origination

Deciding which option to go with may be tricky for customers without the benefit of market experience and insight. The best bet would be to contact a Bond Originator such as the Phoenix Group to professionally and comprehensively assist in finding the best deal that is suited for individual circumstances of each particular applicant.

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