Definitions of interest rates
Repo Rate – [Repurchase rate] is defined as the rate at which the central bank repurchases government securities from the commercial banks. This rate directly impacts money supply in the country. To expand money supply the Reserve bank will decrease the Repo Rate thus allowing banks to swap their holdings of government securities for cash. To contract money supply the Reserve bank will increase the Repo rate.
Prime Rate – this is the rate that commercial banks charge their credit worth customers. The prime lending rate is 3.5% above the Repo rate at any given time.
Fixed Rate –
This means that regardless of fluctuations in the Repo and Prime lending rates your interest rate will remain the same for the specified period.
Variable Rate – with the variable rate option your interest rate fluctuates with the changes in the Repo and Prime rates.
Fixed versus Variable Interest rates:
Fixed interest rates are beneficial in that you will always know exactly what your installment will be for the period that you have fixed your interest rate for. This is especially advantageous if you work according to a strict budget and need to know that your installment will not change with the fluctuations in the Repo and Prime lending rate. The disadvantage in fixing your interest rate is that these fixed rates are normally charged substantially above the prime lending rate which means that if interest rates are on a downward cycle and you have fixed your rate over a period you will not have the benefit of this downward cycle and the resulting lower installments.
Fixed interest rates change on a weekly basis therefore the banks will only allow you to fix your interest rate after your bond has registered as the rate offered at the time of approval would have changed many times by the time the bond registers.
Variable rates tend to fluctuate in line with the repo and prime lending rate changes which would mean that your installment could change at any time with an increase or decrease in the repo rates. The benefits of having a variable interest rate is that these rates are normally accorded in line with the prime lending rate or slightly below and when interest rates are on a downward cycle like they have been for the past 5 years you get the benefit of any decrease in the prime lending rate for that period.
Variable interest rates are offered according to client individual risk rating with a specific bank and this is based on various factors. The variable interest rates can vary from below prime to above prime depending on the clients profile and the banks pricing policy at the time.