As interest rates continue to rise, so does the level of concern for investors in the market.
Many are wondering if this is the start of a market crash, though not everyone is scared. Some see this as an opportunity to invest in real estate while the prices remain low.
The Bank of Canada continued its campaign to bring inflation under control in October, raising interest rates by 50 basis points to 3.75 per cent in an effort to keep up with what they call “moderately stronger” economic growth.
This will mean more money for banks but less for borrowers who are looking at higher monthly mortgage payments as a result. Interest rates are projected to gradually increase upwards, with appreciation in values reported around six per cent. Think of it this way: for every one per cent increase in interest rate, buying power decreases by 10 per cent.
In the eyes of a borrower, they will notice that their monthly mortgage payment goes up after every interest rate hike, making them pay more for the house than they were previously paying. This is because when interest rates go up, so does the cost of borrowing money. The amount of money you have to pay each month on your mortgage is directly affected by the interest rate.
Let’s say you’re borrowing $100,000 at an annual interest rate of five per cent. That means that every year, you’ll owe the bank $5,000 in interest payments. But if the interest rate goes up to six per cent, you’ll now owe the bank $6,000 in interest payments yearly.
So depending on your mortgage, an interest rate hike could result in a higher monthly payment.
This is undoubtedly a pivotal moment for most Canadian real estate investors.
Will high interest rates keep investors from purchasing properties? This is a question that both agents and banks ask themselves. If people cannot find ways around paying higher rates, then it’s possible this could deter customer acquisition in some markets; however, with so many creative solutions available these days (such as mortgage assistance programs), there won’t necessarily need to be any panic among those involved unless something drastic occurs between now and when their loans mature.
While some homeowners may have an “if it ain’t broke don’t fix it” mentality when it comes to their mortgage, now might be an opportunity to consider refinancing at a lower rate.
If the client’s current rate is 4.5% and they can refinance into a 4% interest rate, that 1/2% decrease can save big bucks over the life of the loan. On a $200,000 loan refinanced from 4.5 per cent to four per cent, the monthly mortgage payment would drop from $1,013.37 to $981.88 — a difference of $31.49 per month, or $766.28 annually. And over the entire 30-year term of the loan, there would be a savings of $22,988.40 in interest!
Of course, many factors go into whether or not refinancing makes sense. But it’s important to keep at the forefront that when interest rates go up, plenty of creative solutions could help offset the impact.
In fact, now is a great time to be in real estate. Prices have come down, which means that there are deals for buyers and sellers.
The recent headlines have been scary, and consumer confidence has been shaken. But that doesn’t mean that there aren’t still plenty of opportunities for those willing to look for them.
Brianna founded Endhome with the purpose of partnering with Canada’s top legal talent and encouraging transactional integrity in the real estate space. She takes pride in guiding Realtors to the most qualified legal professional for their situation and helping them navigate the sale or acquisition of properties. Born and raised in Toronto, she attends conferences in her hometown and creates engaging content to share the latest news and market trends with her community.
