Though interest rates may not seem like the most crucial aspect of the buying and selling process for many homebuyers, the truth is that interest rates can have a profound effect on the real estate industry. Because most homes are purchased with loans like mortgages, interest rates can drastically alter the value of a home, supply, demand, and return rates. Understanding how interest rates can impact these things will help homebuyers and sellers make smarter real estate choices.
In general, supply and demand tends to influence property values the most. When there are a limited number of properties available and a high number of prospective buyers in a seller’s market, the prices of homes will generally be higher than normal due to high demand. Conversely, when a large number of properties are listed in a buyer’s market, but the number of hopeful buyers is considerably smaller, home prices will generally fall or be more susceptible to decreases.
The impact of interest rates on home prices may not appear evident initially, but the connection is quite identifiable. When interest rates on mortgages are low, more individuals will be willing to take out a mortgage because they will be able to save more money over time; this, in turn, tends to drive home prices up, as the demand for housing increases. A similar trajectory can be seen in high-interest rates on mortgages, resulting in a cooling market and lower home prices.
Variable-Rate Versus Fixed-Rate
Around one-third of Canadian homeowners opt for a variable-rate mortgage, which means that the interest rate on their home loans is subject to a fluctuating interest rate depending on the economy. When interest rates are generally low, homeowners will generally be more inclined to opt for a fixed-rate mortgage to benefit from the low interest. Still, those who choose a variable-rate may benefit more should the interest rates fall more.
The interest rates on mortgages will influence buyers who are shopping for a mortgage, and when the interest rates are high, they may be more prone to opt for a variable-rate mortgage to help them save money later on. The variable-rate mortgage provides an opportunity for future savings but also presents greater risk; high risk, high-interest rates, and higher home prices contribute to a seller’s market, making interest rates a key player in how many homes will sell and at what cost.
Interest rates influence the likelihood of a buyer seeking a mortgage and the property value and the market at large. Though some individuals may only think of the interest rate as a factor that increases their monthly mortgage payments, the truth is that interest rates have a significant impact on home sales and the real estate industry.
Mehran Redjvani is a trusted real estate agent in the Greater Toronto Area. For more information about buying or selling a property, please contact Mehran!