Can higher rates be a good thing for new buyers?

Interest rates have been in the news pretty much all year, thanks to the Bank of Canada’s busy year of rate hikes. With a current overnight rate of 3.75 per cent, we’re far away from the 0.25 per cent we entered 2022 with, after five consecutive rate increases. Higher rates have resulted in a market cooldown, with less demand from buyers and housing sale prices going down. However, could higher rates be a good thing for buyers in any way? As intimidating as rate hikes can be for first-time home buyers, there are a couple potential advantages of entering the market right now.

You’ll have options when rates go back down

Higher rates themselves might not seem like a great thing. However, if you buy a home with higher rates, and you can manage those rates, you’ll have options when rates go back down. Rates will inevitably drop again. This is the pattern of interest rates, and the odds of a recession are high, which will cause rates to lower. Assuming you can comfortably handle today’s interest rate payments, you’ll find you have more financial wiggle room when rates decrease and your payments lower. This provides you with extra cash flow, because the monthly payments you budgeted for are now smaller. 

With that increased cash flow, you’ll have an extra layer of security, and you can also work towards paying off your mortgage faster. If you like, you can increase your payment amount, which means you will reduce your amortization. The sooner you pay off your mortgage, the more you will save in interest. Be sure to speak with your broker before making these changes to ensure you have this option in your mortgage contract. Also, remember that rate changes will only benefit you if you have a variable-rate product. Since fixed rates don’t depend on the overnight rate, rate drops will not impact fixed-rate mortgage payments.

Sellers are more open to negotiating

When interest rates are high, fewer buyers enter the market, so housing demand drops off. However, sellers are still listing their homes. This means sellers are more open to negotiating with buyers in order to complete a sale, because they don’t have quite as much control over the market. You will be able to negotiate price, and perhaps things like closing dates or completing any necessary repairs. Unlike earlier this year, when buyers had to take what they could get, buyers now have a more powerful position in the market. 

Along with more negotiating, the average sale price of homes in Halifax is on the decline. Price drops also occur when demand levels off, so you are entering the market at a time when homes are becoming more affordable. Assuming you can handle higher interest rates in the short term, you can likely save on the price of your home long-term. Affordability has been the biggest obstacle for first-time home buyers, and right now this challenge is fading a bit.

Helps you focus on needs

On a simpler note, higher rates really help buyers focus on what they truly need in a home. If you’re set on buying and you know you’ll be dealing with high monthly payments, you will be forced to think hard about what you require in a home so you’re not spending more than you need to, or more than you can afford. There are things you will need in a home, and things you would like. It’s your job to separate the two. Things you need might include the number of bedrooms and bathrooms, property/lawn size, and access to amenities and transit. Your wants might be more along the lines of a finished basement, a pool, or a double garage. If you know your housing budget will be a bit smaller in order to make those higher monthly payments, you can go house hunting with a clear list of your requirements and things you can live without if they don’t fit in your price range.

Higher rates are, in general, not desirable to people in the housing market. However, in some cases they can be beneficial to buyers looking for lower housing prices. With inflation still above its target rate, we expect rates to keep increasing, and housing prices to keep declining. If you’re considering entering the market as a home buyer, be sure to reach out to a mortgage broker to discuss your options!

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.