Interest Rate Increase - What Buyers & Sellers Need to Know
Interest rates have been at an all time low since 2020, one of the key factors that contributed to the increase in real estate activity in Newfoundland and across Canada over the past two years. It will come as no shock that these low rates would not last forever, however, we are now expecting rates to rise sooner than anticipated.
The Bank of Canada signaled that it may “hike interest rates three months sooner than previously forecast” according to the Financial Post (October, 2021). The original forecast was for rates to rise sometime in the second half of 2022.
If you are planning on buying or selling next year, here is what you need to know:
When interest rates change, they directly impact the amount of money that a bank will approve for the purchase of a new home. When interest rates are low, as they have been over the past couple of years, the portion of your monthly mortgage payment that goes towards interest is lower. Likewise, the amount that you are paying on your principal is higher. Thus, you will be approved for a higher mortgage. Also, it is financially savvy to purchase while interest rates are low as you are building equity in your home faster.
What can Buyers do? If you are planning on buying a home next year, I would advise that you meet with your mortgage broker in the first quarter of the year and lock in your interest rate for 90 days.
When interest rates rise, it impacts a buyers affordability. The amount that they once were approved for is now lower. This means that there will be less buyers on the market that can afford your home. A house is only worth what someone is willing to pay, therefore your ability to get top dollar for your house may be impacted.
What can Sellers do? You may want to consider getting your house on the market before the interest rate increases. There are a lot of advantages to listing in the winter months. Historically, there are less homes on the market so more people are seeing your listing and you have less competition. As well, buyers this time of year are typically more motivated to buy.