Mitigating the Stigma of Home Purchases in a High Interest Rate Environment

Reflecting on a period where interest rates were considered ‘standard’ and the housing market was characterized as ‘steady’ or ‘logical’, some consumers may look back to the year 2018. Given the current state of the housing market, let’s delve into the mortgage financials by comparing the process of purchasing a home in each of these years.

For the purpose of this analysis, we will maintain identical parameters, altering only the interest rates. In both scenarios, we will consider a $600,000 Fixed Rate 5 Year Mortgage with Bi-Weekly Payments and a 30-year amortization period. Additionally, let’s assume that the down payments remain consistent.

In 2018, the interest rate would stand at 3.25%, resulting in a Bi-Weekly Mortgage Payment of $1,302. Conversely, in 2023, with an interest rate of 5.39%, the Bi-Weekly Mortgage Payment would amount to $1,672. This would lead to an extra annual cost of $9,620 in 2023.

It’s important to acknowledge that while the situation might not be ideal, it is notably different from the circumstances of 1991 when a 5-year Fixed Rate was a staggering 11.75%.

This is not to suggest that the existing concerns about interest rates are unfounded; rather, it emphasizes the distinction between an exaggerated collective apprehension and genuine economic fragility.

Even in less-than-optimal economic conditions, the timeless and invaluable advantages of homeownership persist. Let’s explore some of the benefits of owning a home, particularly when interest rates are elevated.

Advantages of Home Purchases When Interest Rates Are High

Decreased Home Prices:

Elevated interest rates make obtaining a mortgage more costly. This prompts numerous buyers, especially those holding properties with better rates, to pause their property search. Consequently, the market experiences reduced competition compared to periods of lower interest rates. When supply surpasses demand, buyers are favored, empowering them to negotiate with sellers, who might need to lower their asking prices. Although homes tend to appreciate over time, high interest rate periods can bring about price declines.

Lower Risk for Buyers:

To safeguard buyers, certain conditions can be incorporated into the purchase agreement. These conditions must be fulfilled for the sale to proceed. For instance, the home inspection condition is a common one. If significant issues are uncovered during inspection, buyers can discuss repairs with the seller before closing or exit the deal without penalties. While sellers prefer offers with fewer conditions, high interest rate environments provide buyers with more leverage to include necessary conditions and contingencies for their financial protection.

Reduced Likelihood of Overpriced Homes:

During seller’s markets, buyers might be willing to pay more than a home’s appraised value, disadvantaging those without extra funds. Securing a mortgage with a loan-to-value ratio under 20% becomes difficult when paying above the appraised value, necessitating a cash payment for the difference.

Evolving Mortgage and Borrowing Trends:

In contexts of high inflation and interest rates, mortgage borrowers adapt their behavior. Consumers seek ways to minimize monthly debt servicing costs, often opting for shorter-term fixed rate mortgages. This choice stems from the anticipation of future policy interest rate decreases and minimal rate disparities between various agreement lengths. This approach grants flexibility in loan repayment over an extended period.

As August draws to a close, the Advantages of Autumn Home Purchases

Many real estate experts concur that buying a home in the fall, particularly during August, holds distinct advantages. During this season, a robust inventory is typically available, paired with potentially reduced prices as sellers aim to make sales before seasonal shifts. Properties that have lingered on the market longer than usual might become available, which isn’t necessarily a drawback. It could signify an initially inflated price or a departure from conventional buyer preferences.

For budget-conscious individuals or those facing financial constraints, fall presents an opportunity to secure a desirable property from motivated sellers. Competition tends to wane as many, especially parents, finalize their property selections before the school year begins, or postpone their search until spring. By October, seller desperation might peak as they race to close deals before winter, often motivated by year-end tax benefits. Flexibility can be advantageous during fall negotiations.

Furthermore, for individuals seeking personalized attention from real estate agents and a more hands-on approach, this season provides an advantageous window. With fewer properties on agents’ dockets as winter approaches, they can dedicate more time to assisting with property searches.

In summary, while high interest rate environments may bear certain challenges, they also offer unique advantages for prospective homebuyers. Understanding these benefits can help reduce the stigma associated with home purchases during such periods and encourage a more balanced perspective on the housing market.

Curious about discussing Mortgages, Real Estate, or Homes in general?

I’d love to hear from you.

Matt.Monks@MiGroup.ca or Matt@HuronDC.com 519-497-3667