Within a four-month time frame, the Bank of Canada has risen its key interest rate by half a percent. The first interest rate raise came in July, followed closely by a second one this month. This is the first time the Bank of Canada has risen interest rates in seven years.Experts and officials have strongly indicated the hike has come on the back of positive economic data. It has been stronger than expected, supporting the view that Canada's growth is more self-sustaining and broadly-based. In the second half of this year, the Bank predicted the pace of Canada's growth to moderate.
Higher interest rates usually have a cooling kind of effect on growth, helping to keep inflation in check as an economy gets stronger. Lower interest rates stimulate economic activity, making it easier and more affordable for consumers to borrow. The recent interest rate increase will have the oppostive effect.
The biggest impact of the increase will be seen on mortgages because they are a large sum of money. Even a small 0.25% increase, like the one we saw in July, can result in tens of thousands of dollars in extra interest payments over the life of a loan. Now Canadians are experiencing another 0.25% increase.
How Higher Interest Rates Will Affect Real Estate Investors
Many Canadians have enjoyed cheap debt like mortgage rates, which have been falling since the 1980s. With the recent interest hikes and the years to come, real estate investors and homeowners could see a reversal of that trend.
The biggest problem with rising interest rates is simply that the cost of borrowing money goes up. It impacts all lending whether it be a credit card or a mortgage. Real estate investors with fixed or existing mortgages won't be immediately affected. Those refinancing a fixed mortgage in the next little bit will probably still score a lower rate than years past.
Variable mortgages, on the other hand, could see an immediate effect because they move with the Bank of Canada rate. In a survey conducted by Mortgage Professionals Canada, it was found that roughly 25% of buyers chose a variable or adjustable rate mortgage last year. Investors with this type of mortgage should expect to pay more on a monthly basis for their apartment building's mortgage.
Real Estate Benefits of High Interest Rates
Seeing as it will cost more money for real estate investors and homeowners to buy, the housing market could cool. Falling interest rates have been a crucial driver of the real estate market in the past since buyers can take on larger mortgages. Higher carrying costs would reverse that.
If the housing market were to cool, investors could take advantage of the resulting lower apartment prices. Since it will cost more to get a mortgage loan, there's the possibility that many investors will back away and let things settle for a bit. If that were to happen, prices would go down even further, and investors would get their pick of the crop.
The recent interest hikes have created a sudden rush in the real estate market as investors leap to buy before it becomes even more expensive. What investors need to do is take a brief step back and stay away from the rush. In a moment like that, you could end up buying an apartment building that doesn't align with your investing needs. Go back to the drawing board, do your due diligence, and get the right investment property because there is no real rush.
Real estate investment is long-term. When you buy the right apartment building, everything will fall into place despite the current interest rate number.