In the Bank of Canada’s most recent December announcement, many saw glimmers of hope that interest rate hikes were over. The Bank of Canada held the overnight rate at 5% for the third time in a row and said the slowdown in the economy was helping to bring inflation down to its 2% target. The general consensus among economists is that interest rates will start to trend downward in mid-to-late 2024, however, if key economic indicators change then the trajectory of interest rates could also change.
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With the prospect of lower interest rates potentially around the corner, should homebuyers hold off on their purchasing plans to secure a lower rate? Or is it better to invest in a home now before a potential surge in competition drives home prices up? Here’s everything you need to know about when to buy and when to wait.
Leveraging Lower Rates: The Benefits of Waiting
In a low-interest rate environment, buyers generally have increased buying power. This might allow them to snag a home that was previously out of reach. This means that you may be able to afford a larger home with more bedrooms or you can snag a pricier home in a sought-after neighbourhood.
The main benefit of waiting for lower interest rates is that you’ll have lower monthly mortgage payments. This means you’ll pay less interest over time and you may have a stronger sense of stability. Which potentially leads to more savings for your family. Since home prices will likely rise when interest rates decline, you also have the opportunity to build a significant amount of equity when buying a home when interest rates are lower. For example, a home in Toronto bought in April 2020, when interest rates were at their lowest, at the benchmark price of $822,700, may have appreciated by more than $240,000 over the last four years.
Why Waiting for Lower Interest Rates Might Cost You More
As the 5-year fixed mortgage rate fell in 2020, the benchmark price of a home shot up. When the 5-year fixed mortgage rate bottomed out in December 2020 at 1.39%, the national benchmark price hit a record high of $595,200. From there, the benchmark price climbed continuously for 15 months. What does this mean for homebuyers in 2024?
Although lower interest rates may increase your purchasing power, there’s a chance that this will be offset by a surge in home prices. As interest rates begin to lower, there will likely be an influx of buyers into the market and this heightened competition will keep prices propped up. In such a competitive market, there’s a higher chance of bidding wars, leaving buyers with limited negotiation power.
With that being said, for any of this to happen interest rates have to drop first, and predicting exactly when they will drop is somewhat of a throw of the dice. The last time the Bank of Canada lowered the overnight lending rate was in March 2020, in response to the COVID-19 pandemic – an event nobody could predict. By choosing to wait, you run the risk of waiting for a prolonged period, potentially much longer than you may anticipate. During this time you may miss out on hidden gems and advantageous deals that could arise in an unpredictable market.
Get Ahead of the Competition with Higher Rates
Higher interest rates typically keep many potential buyers on the sidelines. Buying during a high-interest rate environment allows you to have more choices and more control. With less competition comes more negotiating power, more inventory to look at, and more time to make your decision. You likely won’t have to worry about competing with multiple offers and you may even benefit from lower prices. This is because, in slower markets, it is common for sellers to reduce their asking price to attract more buyers.
Though higher rates come with higher monthly mortgage payments, that doesn’t mean you will be locked into that rate permanently. Most rate terms are 3-5 years. Throughout your amortization period, interest rates are bound to fluctuate. If rates do drop, then you can always take advantage of a lower rate at the time of renewal or refinance your mortgage to secure a better rate. This strategy could end up saving you money in the long term. Especially if you purchased your home when prices were lower and could lead to you paying off your mortgage sooner than if you bought when prices were higher.
Deciding whether to buy a home now or wait for potential interest rate relief is a significant financial decision. Each individual’s circumstances vary, so the decision should be tailored to your unique situation. For those seeking a long-term family home with plans to reside there for a decade or more, finding the right house might take precedence over immediate affordability concerns. Conversely, for first-time buyers primarily focused on entering the housing market, financial considerations could play a more critical role. Ultimately, the best course of action hinges on a balance of your personal needs, market conditions, and financial readiness.
Do you have questions about mortgages, interest rates, or your local real estate market? Give us a call today and one of our experienced agents can help answer any of your real estate questions.
