Rising Interest Rates and Real Estate

Rising Interest Rates and Real Estate

In a dynamic free market, lenders compete for home buyers’ business, which drives up or down average monthly interest rates on mortgage loans, whether government-backed or privatised.

The average interest rate on 30-year fixed mortgages has remained near historic lows from 2013 to 2021, owing to corrected house prices, tighter credit criteria, and a shrinking surplus of unsold homes, but has begun to rise in 2022, while it is still at historically low levels.

Rising mortgage interest rates are nothing to be afraid of, and understanding the subject will help to calm the nerves of housing market participants. Rising mortgage rates affect almost every aspect of home buying, therefore it’s critical for housing market participants to understand them.

Rising Interest Rates and Homebuyers

Conventional wisdom in the real estate industry holds that rising interest rates make purchasing or selling a home more difficult, while dropping interest rates make buying and selling easier.

For example, if Johnny Home Buyer desires a 4% rate on a $400,000 home with a 30-year fixed mortgage, his monthly mortgage payment will be $1,900. Johnny’s monthly payment would jump to $2,138 if he only qualified for a 5% rate on a 30-year fixed mortgage. Johnny’s payment will increase by $238, or nearly 13%, if interest rates rise by 1%. So, what does this imply for prospective homebuyers?

Affordability falls as mortgage rates rise, from the standpoint of a property buyer. In the scenario above, Johnny Home Buyer wants to qualify for a $400,000 mortgage at 4% interest, but lenders can only offer him a $355,000 loan at 5% percent because of his qualifications. Johnny’s purchasing power is reduced by $45,000 for every 1% increase in mortgage interest.

Johnny Home Buyer would have been able to “qualify” for that $400,000 mortgage before the Great Recession, during the height of the subprime mortgage craziness.

A subprime lender, on the other hand, would have offered Johnny a 2% adjustable interest rate for the first five years to sweeten the deal. After five years, however, Johnny is on the hook for at least 7% interest, maybe more if interest rates spike.

Rising Interest Rates and Sellers

Rising mortgage rates have an impact on sellers, too, though in a different way. For instance, if Jill wants to sell her house for $400,000, she is free to do so. However, due to rising loan rates, potential purchasers can only afford Jill’s home, which is priced at $355,000.
Clearly, she can still make a profit on the sale, but even a 1% increase in mortgage rates reduces Jill’s home’s market worth by nearly $45,000.

Her profit will be determined by how well she trades. In other words, if interest rates rose rapidly, it would slam the brakes on the housing market.

Rising Interest Rates and Property Value

Buyers and sellers are both affected by rising interest rates. Theoretical scenarios demonstrate that property worth and housing prices are directly related to mortgage rates, but the economy’s health underpins both scenarios.

Rising mortgage rates will have less of an impact on home values and prices if the economy improves quickly enough. If mortgage rates rise one point, monthly payments will rise by $238; nevertheless, a robust economy will allow businesses to raise salaries sufficiently to offset the higher interest rate.

A hike in interest rates should not paralyse the housing market as long as the economy keeps growing and seeing job and pay growth.

Rising Interest Rates and Real Estate Investing

The effect of rising mortgage rates on real estate investing can be good. Because fewer people can qualify for mortgages, the market for rental houses will grow. Rising interest rates, on the other hand, lower prices, therefore it’s sometimes wiser to buy while rates are rising.

Furthermore, when interest rates rise, lending standards will tighten, resulting in fewer real estate transactions. As a result, more people will require rental properties until they are able to obtain a mortgage. In the proper home market, a 1% increase in interest can convert into a windfall profit for an investor.

What Happens to Mortgages When Interest Rates Go Up?

Mortgages become more expensive as interest rates rise, as the interest rate on mortgages rises as well. This raises the cost of home ownership for customers. The demand for properties declines as they become more pricey. As a result, the housing market suffers a downturn. In order to attract buyers, sellers lower the price of their property.

Are Rising Interest Rates Good for Mortgage Companies?

Yes, higher interest rates benefit corporations that lend money to those who want to buy houses. The more interest a mortgage company/bank earns, the higher the interest rate. As a result, the bank earns more money. Mortgage businesses, on the other hand, may suffer from a loss of business if interest rates are excessively high, resulting in a large decline in demand for mortgages.

The Bottom Line

Interest rates are still around historic lows, which is good news for buyers, and today’s market reflects some of the most affordable lending available.

Most essential, choosing the perfect mortgage requires sound counsel from a seasoned real estate professional who owns a number of properties and has handled a number of real estate transactions on behalf of others. Working with a professional can help potential investors feel more informed, confident, and secure about their financial decisions.

Contact our experts for personalized advise and real estate investment planning. Call 416-878-0749 or Register here.




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