Although there are many sun categories, bonds basically fall into two different sun categories: those that are based on fixed interest rates and whose interest rates fluctuate during the loan’s duration dependant on terms agreed by the lending bank and the borrower when the loan was issued. Fixed interest rates are more popular, simply because the borrower knows exactly where they stand at all times in relation to their loan.

Fixed rate bonds have been around for many years if not decades. They are especially appealing to the home owner who looks upon their bond as a long term commitment, and need to be assuring that their bond payments will remain the same for the duration. In other words they are not really prepared to go into the nuts and bolts of their bond make up, and instead are prepared to pay whatever the bank asks of them.

Most fixed rate bonds are long term running between twenty to thirty years. Generally the most that people who areconservative enough to tie themselves down to a fixed term bond is to take out their bond over fifteen years. They would normally do so if they had a higher than average equity, as well as an income sufficient to meet the higher monthly payments. The general and significant factor in taking out a short term fixed interest loan is that the overall interest to be returned on the loan is lower.

Theoretically banks should be capable of tailoring their loan offers to match their customer’s requirements entirely. People who are asking for a bond should be able to take one out for a period of twelve years, or seventeen or whatever suits their long term financial plans. Banks are not so interested in this kind of intricate dealing, and are only prepared to offer bonds in units of five years. The most popular is twenty five, although fifteen year bonds are becoming more popular. Banks can provide a bond that will run for forty years. However this is a kind of long term commitment that would be unwise to make in the majority of cases.

Bonds where the interest rates fluctuate can be appealing to certain individuals who like to keep their finger on the pulse as far as interest payments are concerned. There are now certain types of bond packages which begin with a fixed rate of interest over an initial period, usually no less than ten years. Banks are more inclined to be flexible after this period of the loan’s duration as they have in theory recovered a fair percentage of the principal and can afford to be more accommodating to their client’s requests.

The homeowner will have the advantage of requesting that the blame of their loan be adjusted to the market conditions at that time. If interest rates are lower than they were when the original bond was negotiated, then the borrower will ask for the interest rates to be adjusted accordingly. Their bank is obliged to comply with this demand, but will charge a one –off fee for the privilege. It will be the responsibility of the borrower to assess that the savings in interest made will cover the cost of the fee.

Another problem with this type of agreement is that should interest rates rise, then the bond holder will find that their mortgage payments will be adjusted to meet the new rate, and they are no better if not worse off. Most people prefer fixed rate mortgages and the majority of bonds held in South Africa fall into this category.