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How Can High Interest Rates Lower Overall Costs?

Anyone watching the real estate market right now likely has the same question in mind; When will interest rates go down? And is it a good time to buy? The long and short of it is there is no simple answer, however historically speaking the rich often get richer in times of economic struggle. While it may seem like a contradiction to buy when interest rates are high, investing in real estate now may actually lower your overall costs.

Buyer Psychology

The first thing we need to understand is the psychology around interest rates and buying. Typically when interest rates are high, many buyers lack confidence in the market. They are fearful of higher monthly payments and are waiting for rates to come down or housing prices to drop further. While no one can predict the future, what we do know is that the Ontario housing market is relatively stable. Prices may have dropped from inflated values at the February 2022 peak, but supply and demand factors will keep prices steady.

Less Active Buyers

What this means for active buyers is less competition as those with a lower economic stress threshold decide to wait on the sidelines. If you are buying a home now, you are doing so with less competition. We see this firsthand with buyers; we are often the only party submitting an offer on a property. When you are not competing with other offers you have more negotiating power. This applies not only with price, but also allows an opportunity to include more conditions in your offer.

Lower Risk

Your chances of buying a problematic property are significantly lower, and so is the chance that you will purchase more than you can afford. When rates were low, many buyers went into bidding wars, overextending themselves and buying more than what could fit in their budget. Chances are you probably know someone who is now feeling the weight of a higher mortgage payment they didn’t prepare for. Higher rates are almost like a fail-safe plan. It is harder to get approved so the chances of you purchasing more than you can afford are quite low.

Lower Costs

All these factors contribute to lower overall costs. We're seeing houses priced, and selling, for market value rather than over. Some properties that have sat on the market for longer are even selling under the asking price. For the most part, buyers are not overbidding so down the road they will make back more on the purchase price when they go to sell. Lower purchase prices also equate to lower closing costs. In the short term, you can save a fair amount of money with land transfer and municipal taxes here in Toronto, and since real estate is usually a long term investment, high monthly payments are also temporary.

Future Refinancing

For those who may not be able to support further interest rate hikes with a variable mortgage, we are seeing more short term fixed mortgages. This option allows you to remain at a rate you know you can afford, but also the ability to negotiate and assume a better rate in a matter of two years for example. Most experts are predicting that interest rates will remain steady for the next several months and then even out to a normal rate by the end of 2023 or in 2024.

Essentially if you are debating whether to buy now, or wait for prices to drop, think like the rich and take advantage of the current market while you still can!

Looking for someone to help you get started in the market?

Sources: TRREB, CREA


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