“What?” you may ask, “There are pros to higher mortgage rates?” Most people are well acquainted with the benefits of lower mortgage rates. However, there are times when higher rates do provide an advantage.
In this article, we will outline both sides of this argument when it comes to mortgage rates in Toronto.
What generates a rise and fall of interest rates?
When the Canadian government wants to encourage borrowing, they lower interest rates. Low interest rates stimulate economic activity by making public spending easier. It occurs when a credit surplus exists.
When there is a credit shortage, borrowing is discouraged. Thus, raising interest rates makes lending more expensive. This tactic combats rising inflation.
Regarding financial institutions, lending money creates a potential risk that borrowers may not make their payments. Their incentive for taking the risk is interest. Since risk decreases during good economic times, interest rates lower. During economic uncertainty, interest rates increase.
How are higher mortgage rates beneficial?
Higher mortgage rates drive down the demand for homes. Since payments are less affordable, the once-hot housing market slows down. When demand is high, homebuyers either end up paying more due to price wars or lose the opportunity to move into the house of their dreams because they are outbid.
So, despite the potential for paying more in terms of a mortgage, things may equalize when the effects of high housing demands are considered. Furthermore, with less demand, houses remain on the market for longer durations. It permits the housing inventory to slowly increase. This provides for a healthy, balanced market.
While the high mortgage rates aren’t as advantageous when selling, buyers can take their time while shopping for a home. They don’t have to worry about being outbid or overspending.
How are higher rates detrimental?
When interest rates increase, borrowing becomes expensive. Homeowners spend more on interest than decreasing the principal amount. This translates into paying down your house at a slower rate.
Interest rate hikes tend to drive down the housing market, affecting sellers and buyers alike. Sellers aren’t motivated to put their house up on the market for fear of being unable to sell it or selling it at a lower price. Everyone wants more for their investment, and houses are no exception.
Higher rates are not advantageous when renegotiating, moving, or purchasing a new home. Even nominal interest increases can cause homeowners to pay thousands of dollars extra, making debt repayment challenging.
What can you do?
During times of high interest, you should examine your options. Consider all variables when making an informed decision. Weigh the pros and cons of buying now versus waiting. While the market may not be as hot, you may not have to be concerned about price wars driving up costs.
Furthermore, you may buy a house large enough for yourself and/or your family. Bidding wars mean that people can pay more for smaller homes. Higher rates became the equalizer.
For more information, call Northwood Mortgage at 416-969-8130 to discuss mortgage rates in Toronto or contact us here. Our team can educate you on the best options for your next or pre-existing mortgage.