Falling interest rates is one of the precious few things to smile about at the start of a recession. Banks have dropped their prime lending rate from 15.5% to 11% over the past six months. But governor Mboweni has signalled that this might be the last rate cut for a while. Should you fix your mortgage rate now before prime starts soaring again?

In South Africa, variable mortgage rates, expressed as prime minus a percentage negotiated between you and your bank, are the norm. But most banks also give you the option to fix your mortgage rate for a period of between one and 10 years. Unfortunately, you can potentially run into two problems when you fix that rate.

Firstly, you are bound not only to the rate that you’ve been offered, but also the term that you’ve chosen. Should you wish to get out of that 10-year fixed rate contract, for example, your bank could enforce a heavy penalty.

Secondly, the fixed rate offered is often not very attractive. It is driven by the expectations of traders in the fixed interest rate market. If you think you have a few good reasons to expect rising interest rates, the traders have probably priced in those same expectations. In these market circumstances, the result is a fixed interest rate which is higher than the current prime lending rate.

There are exceptions. John Loos, strategist at FNB Homeloans, recalls that FNB offered 13% to a fixed rate client in January this year, 200 basis points below prime at 15%. At that time the overwhelming consensus in the market was that a series of rate cuts is on its way, the majority of traders predicting it would be somewhere between 300 and 400 basis points. Will this client beat the average rate of the interest rate cycle over his selected term? Who knows? Like any gambling game, the winner ends with a distorted sense of his or her powers of prediction.

Rather than an instrument to try and beat the country’s average official interest rate over a selected term, the fixed interest rate was designed to provide mortgage owners with some certainty. It makes most sense for those who would not be able to afford their mortgage repayments when rates rise, and for those who sleep better when they know exactly what their repayments for the next few years will be. Like any insurance, though, the certainty comes at a cost: the premium that traders in the fixed interest market charge for exchanging the risk of the variable rate and providing you with the safety of the fixed rate.