How will interest rate increases affect home buying?

It was bound to happen, and it isn't something that one needs to worry about. There's much talk out there about interest rates, what they mean, and how they will affect us? There's also a lot of misinformation about how interest rate increases or hikes may be considered a bad situation for many people or the economy.

In reality, it is not as nefarious as it seems, and in fact, raising interest rates can actually be beneficial in the long term for numerous reasons. Let's look at what interest rate increases truly mean and how or if they will affect home buying?

Why do we increase interest rates?

You've probably noticed how the price of everyday items has increased significantly in the past year. That's due to inflation and the economy overheating at a rapid rate. Rates had been at all-time lows, meaning that the cost of money was cheap.

It is intended to fuel and grow economies that may otherwise fall stagnant if people aren't spending. Yet when the price of your groceries rises to a point where you're starting to budget more than you've needed to in the past, it could strain your purchasing power. That's why there's a government elected body that manages the government interest rates that cascade down to borrowing rates and the cost of money.

At the end of March, inflation was at 7%. That is excessively high and will continue to go up for the next few months as interest rates are slowly starting to rise. The Bank of England has already risen the rates three times, with the last increase also occurring in March. It's doing this to taper and cool off the economy and help bring back price stability across the sector.

That means spending should decrease due to the cost of money increases, and that slowing down helps bring back down the prices. Pretty simple? Also, short-term in many cases. This is because we'll need to turn back the economy and bring down the rates again down the line.

How does this affect home buying?

Well, here's the point where it gets a bit tricky. Currently, home prices are at all-time highs, yet it was easier to buy homes since heading to the bank to borrow money at ultra-low rates was easy for many. It led to lower monthly payments for the mortgage and thus higher amounts that you could borrow.

The first thing we'll notice is that as rates go up, the price will slowly start to go down. That means we might borrow smaller amounts but still have the same monthly payments. More of our mortgage payment will go towards interest than principle, and thus money becomes effectively more expensive.

That will mean that the housing market will start to slow down, but not at a swift pace. Just a stable rate, where there are fewer qualified buyers, and the inventory levels begin to pick up again across the nation.

This cooling-off is necessary for many aspects because it also helps to prevent the issue of a housing bubble. A housing bubble is where the pricing of houses goes up so high that they end up bursting the real estate market, which can have detrimental long-term effects, as was seen globally in 2007 and 2008.

What does the future hold?

Regardless, it's essential to stay educated and watch how the markets unfold in the coming months and next few years. Whether you plan on buying now or down the line, it's essential to know what may change if you haven't started the home buying or selling process yet.

You need to know that if you buy now, the prices may be higher than intended, but they will lock in your mortgage rates for a very long time. For every interest rate hike you wait, you will notice the price of homes start to slow their increase and even drop in some areas, but it will be much more expensive to buy them.

Either way, as mentioned earlier, this is a short-term effect for a long-term solution. This helps us pull back the heat and pressure on the economy to alleviate an explosive collapse down the line. Rates and price movements themselves won't deter the fact that home ownership benefits still far outweigh the benefits of renting. Those looking for a solid professional partner should reach out to us with any questions.


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Published on :  

January 29, 2024

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