THE CASE FOR WAITING:
On a $500,000 loan, a 1% difference in interest rates translates to almost $300/month on a mortgage payment. This $300/month may not seem like much, but it can make a huge difference for some families in terms of affordability.
A lower mortgage rate directly impacts the amount a buyer can qualify for.
Under federal “stress test” rules, prospective homebuyers must qualify for their financing at whatever their interest rate will be, plus 2% (for example, if their promised rate is 5% they must qualify at 7%), or 5.25%, whichever is lower. If interest rates go down, then buying power goes up - to the tune of nearly $50,000 on a $500,000 purchase price! Being able to qualify for a larger loan can make a big difference to buyers who are finding it hard to get what they want within their current budget.
THE CASE FOR BUYING NOW:
Although fixed rates are slowly going down, the federal government rarely makes drastic changes to interest rates. They typically favour small, subtle changes over time. Most expect the prime rate may not start to come down until Q2 or Q3 of 2024 at the earliest, and it could take 6-12 months or much longer after that before we see prime affected by even 1%.
Prices in Calgary are on the rise, and waiting means paying more for a home.
We have seen double digit price growth in most markets over the past few years, and prices are expected to continue rising in 2024, with most estimates near 10%. Assuming it takes 12 months for rates to drop by 1% (which is on the optimistic side), a buyer waiting for a lower rate to start shopping may be paying 10% more for the same home they would be buying today. Obviously, nobody has a crystal ball about where prices will be, but a 10% higher purchase price would effectively wipe out most of the benefit of a 1% lower rate.
Waiting for rates to drop means waiting until the market is even more competitive than it is now.
There are many, MANY buyers on the sidelines right now due to higher interest rates. If rates drop, many of these buyers are expected to jump back in to the market, which would only add to the current high demand for housing. We are already in a seller's market, so it's hard to imagine what even more buyers in the market would look like! Buyers who are currently shopping are already facing the reality of having to compete with other buyers for nearly every home that hits the market. An even busier market would mean even more competition to buy that same home..
Rents are on the rise.
Prospective buyers who are currently renting and waiting for rates to drop before making the leap are likely to experience some shock when their lease is up for renewal. Rents are skyrocketing all over the city, going up by $300-$500/month or more on renewal (and sometimes more!). Compare that against a prospective mortgage payment, and there's a strong case for buying now.
IN SUMMARY:
There are real, valid reasons why a buyer may feel it is best to wait for rates to drop before making a purchase. And, in a relatively flat market, it would make sense to wait for rates to drop before making a huge investment in the real estate market. However, what most people aren't taking into account is that the current Calgary real estate market is on fire, and prices are on the rise. In a hot real estate market, rapidly rising prices can easily outweigh any potential gains made from a lower interest rate. This is why we believe that buyers looking to make a purchase in the next year or two would be better off purchasing now with shorter term financing, than waiting for rates to drop.
SO WHAT NOW?
If you still have questions and would like to chat with someone on our team, we would love to help!
Contact us here.
