They're Coming: Higher Interest Rates

We saw with the global pandemic a major drop in interest rates for homes (this wasn’t limited to houses, but for the sake of this topic, we’ll limit it to houses). The cost of borrowing money was lower than it had ever been before because of this unprecedented situation. Among the negative storm of the world being affected by COVID-19, low interest rates were a positive ray of sunshine. Buyers were able to take advantage of this side effect, which made affording a home easier than it had ever been before.

Now, as the world adapts to live despite this virus, the economy is adapting in order to recover. This means that interest rates will be on the rise, affecting all types of borrowing. We are already seeing banks here rise their rates, though of course in small increments.

With this new trend, buyers, sellers and homeowners alike are all concerned what the future will hold.

How high will rates climb?

How will these new rates affect you/your situation?

How will this trend affect real estate in your area?

Let’s set your worries at ease, and discuss the most logical outcomes:

Effect on Homeowners

To put it simply, more of your mortgage payment is going to be put towards the interest on your loan, instead of the principal balance.

So, if you have a variable interest rate, you’re going to see that increase in your interest rate sooner rather than later. Increases and decreases can happen multiple times during the term, as you probably already know. For homeowners that chose a fixed interest rate, the increase in interest rates isn’t going to affect your mortgage payments until the time comes to renew. At that point in time, your lender will show you the new rate, and the factors that influenced it. Those factors would include: the current prime and posted interest rate, the length of your mortgage term, the type of interest rate you choose, your credit history, your earnings, and your employment status.

Renewing with a fixed rate may mean locking in a higher interest rate than the variable option. However, it’ll ensure you keep the same payments to your principal over the term of your mortgage. This is beneficial to you if interest rates continue to rise after you’re locked in.

Effect on Sellers

The market scales will balance out once again. For the past couple of years, sellers have seen the market lean in their favour. With more buyers came more competition, especially with the low amount of houses for sale in our area. Multiple offers were common, and with each offer came an increased price. This meant that sellers received more money back on their home

investment, with better opportunities to upsize or downsize into their next chapter of life more comfortably. With interest rates beginning to rise, the sellers’ market may begin to wane, eventually levelling out to a balanced state. Sellers looking to buy again will be looking at the interest rate increase if they’re still paying off a mortgage after the transaction is complete.

Effect on Buyers

There’s going to be pressure put on you to lock an affordable rate on your loan as soon as possible. Even with small interest rate increases, your mortgage total is going to be sufficiently affected (compared to no interest rate change). Instead of being pressured to send a seller your offer to purchase before other buyers, that pressure will instead start to be applied by your lender regarding your loan. This makes it doubly important for you to know ahead of time what you are able to afford, and how to lock in the best interest rate. This means making sure your credit history is good, preparing a larger down payment if possible, paying off any credit card debt you have and saving as much money as you can (high interest savings accounts are wonderful!).

Even with interest rates expected to rise, it doesn’t change the fact that our team at Able Realty will always be there to help both buyers and sellers!

- From the C21 Able Realty Blog