How Interest Rate Hikes Can Affect Homeowners

The media is spending a lot of time talking about rising inflation and interest rates. We know all too well that higher inflation means we are spending more money to buy basics like gas and food and, as a result, have less disposable income.

But how do rising interest rates affect homeowners, especially if you are thinking of selling in the next year or two?

When we look at supply and demand, the activity of buyers (the demand) plays an obvious and important role in the happenings of the real estate market. When we consider demand and the fact that the primary tool used to control inflation is interest rates, GTA homebuyers will qualify for smaller mortgages than they did before and will have higher mortgage payments too. 

The biggest factor at play in our real estate market right now is buyer psychology, and that’s almost impossible to predict. If buyers think rates will continue to increase, they may buy sooner rather than later to take advantage of today’s lower rates; but they might also see an interest rate hike as a red flag and decide to wait and hope that prices will come down. Both options affect demand and ultimately home sales activity and prices.

How Do Rate Hikes Affect Homeowners?
If you’ve already got a mortgage, you might think interest rate hikes don’t affect you. Wrong! When you first got your mortgage, you made a few important decisions:

• Amortization Period (usually 25 years)
• Mortgage Term (usually between 1 and 5 years)
• Type of mortgage rate: Fixed or Variable
• Interest rate

Mortgage Renewals

At the end of your term, your mortgage will come up for renewal – meaning that you’ll be subject to the prevailing interest rates. If current interest rates are higher than your old rate, your monthly carrying costs will go up. If rates go up significantly, some people may not be able to afford their homes anymore. Thankfully, the federal government introduced a mortgage stress test a few years ago to ensure that homeowners would still be able to afford their homes even at much higher interest rates.

Variable Rate Mortgages

Most variable-rate mortgages have floating or adjustable payments, meaning that the amount of your mortgage payment changes with the bank’s prime interest rate, so rising interest rates result in higher mortgage payments. 

If you have a fixed payment variable mortgage, where your payment doesn’t fluctuate with interest rates, the percentage of your mortgage payment that goes towards paying down the principal on your mortgage will decrease, which means that more of your payment will go towards paying interest than building equity and will increase how long it will take you to pay off your mortgage. 

Most variable-rate mortgages have the option of converting to a fixed-rate (meaning your rate does not change for the length of your term, and so the payment won’t vary when interest rates change). Historically, variable-rate mortgages have been cheaper, but if you think interest rates are going to continue to increase at a fast pace, you may want to consider converting to a fixed-rate mortgage.

Our Advice:  Don't try to time the market.  In the short term, real estate prices fluctuate. However, over the long term, prices will inevitably increase - just like the price of milk.  Remember the big dip of 2017?  Prices fully rebounded and have increased handsomely since then. So do the right thing for you, whether that’s deciding to buy now, buying later, or deciding to sell. 

If you'd like to run through the pros and cons and crunch some numbers, we're just a call or email away and can provide you with the data you need and, more importantly, interpret the data as to how it would apply to your specific situation. 

You may also enjoy reading:  It's Not All About the Rate!