Three Key reasons Why Rising Interest Rates Shouldn’t Worry You
The Bank of Canada’s (BoC) announcement that it would be hiking interest rates to fight inflation came after two unprecedented years in Canadian real estate. On June 1st, Canada’s key interest rate went up half a point to 1.5%, and is expected to go as high as 2.25% if the BoC follows the US feds and increases it by 0.75%. Since the beginning of the pandemic, house prices rose about 50% on average; two years of a hot market led to shattered records across the board, and a stunned housing market. After years of unpredictability, it’s little wonder that the recent rate hikes have led to concern amongst both current and prospective Canadian homeowners, however, fear not, says Peggy Hill.
In a conversation with Nick L’Ecuyer from The Mortgage Wellness Group, Peggy outlined why both prospective and current homeowners shouldn’t be wringing their hands over an interest rate increase. Here are three factors to keep in mind when considering how rising interest rates will impact you and your family:
These interest rate increases were expected
The Bank of Canada raising the prime rate from 3.2% to 3.7% didn’t come out of thin air; it was an anticipated move by those with a finger on the pulse of the housing market. This increase comes on the back of another half point increase in response to inflation and record-breaking housing prices. “I think it would have been more of a shock if they only went up .25,” says Peggy. Nick agrees, saying that the increase “was anticipated…forecasted, [and] expected.”
Peggy and Nick note that even after the last increase to the prime rate, interest rates are generally still good. In fact, the current prime rate of 3.7% is still lower than the pre-pandemic rate of 3.95%.
As interest rates go up, house prices go down
Don’t let fear of rising interest rates prevent you from achieving your real estate goals. Interest rates and house prices generally have an inverse correlation, meaning that when interest rates are high, selling prices are low. While both interest rates and home prices remained high at the beginning of this year, we’re finally beginning to see the market cool off. What does this mean for prospective buyers and sellers? Peggy says that despite the average market value of a home decreasing, we are still very much in a seller’s market. And her advice for buyers? This market presents a great opportunity to buy, because higher interest rates are balanced by the lower selling price of the average home. This means that despite the change, buyers are essentially spending the same amount on their homes. Plus, five years down the line, homeowners who bought for a lower price with higher interest rates will owe less than those who bought at a higher price and lower interest rates.
If you have a fixed interest mortgage, your rates will stay the same
Peggy’s main takeaway from this announcement applies to the 70% of Canadian homeowners who have a fixed-rate mortgage: if your rate is fixed, your interest rate and payment will not change, despite the increase to the prime rate. “If you’re not planning to sell or buy, and you’re just concerned about the market, you likely have nothing to worry about,” says Nick. “The numbers look astronomical and they’re not…there’s no need for fear and panic,” adds Peggy. Most renewals are automatically mailed to you at the end of your term, so typically no requalification is necessary; meaning homeowners don’t have to worry about selling their home when renewal time comes because they may not requalify.
If you’re a home buyer considering going with a variable rate mortgage, now is the time for you to get pre-qualified and lock in. Currently, most variable terms come with a 1% discount on the prime rate. This is expected to be taken away in the next few months, however if you lock in, you will be able to keep that discount.
If you’re still concerned or have questions about interest rates and the housing market, Peggy encourages you to reach out to a real estate or mortgage expert. The Peggy Hill Team is always available to answer your questions — connect today to learn more about the market and how to make your real estate dreams a reality.
Watch the full conversation here: https://www.youtube.com/watch?v=SxzhMACtgzE