Tips for buying a home in a higher rate environment

By Jesse Abrams
December 18, 2023

In today’s economic landscape, marked by higher interest rates and inflation, the decision to invest in real estate can be complicated and isn’t always a simple yes or no. It’s about uncovering opportunities that can sometimes arise in markets where conditions are less favorable.

Declining home prices

When interest rates rise, this will often lead to a drop in housing prices. As rates go up, the pool of buyers decreases, which often leads to a decline in home prices. If you have excess funds or are in a financial position to invest, this can present a unique buying opportunity. Although the cost of borrowing is more expensive, buyers can purchase a property at a significant discount that might not be possible in a lower rate environment.

Less competition in the market

With the pool of buyers much smaller given higher rates, there is a lot less competition in the housing market. With fewer buyers, bidding wars and the chances of overpaying for your home are a lot less slim compared to a couple years ago. These conditions favour the buyer because they have a lot more negotiating power and a better chance to purchase their desired property at a reasonable price and within budget.

Buyers have more negotiating power

With fewer Canadians in the market to buy, homes remain listed for a lot longer with most sellers likely eager to close deals. This gives buyers negotiating power and the ability to buy a property with more of what they want and need than less. For instance, negotiating a lower price, paying for home repairs and improvement, or other beneficial terms or terms and concessions. As you can see, a higher rate environment can be leveraged in the buyer’s favour.

Price vs rate differences can actually lead to savings

We can’t deny that higher interest rates result in higher monthly mortgage payments, which impacts affordability for both existing homeowners and prospective buyers. However, a lower purchase price can not only help to offset this monthly cost, it can drastically lower the cost of ownership overall. When you calculate the total cost of owning your home for the time period you plan to live in the property, sometimes paying more each month at a significantly lower property price can make sense over the long term.

Here’s a quick calculation:

If a home is priced at $900,000, with a mortgage of $720,000 (20-per-cent down payment) when interest rates were low at 2.5 per cent, monthly mortgage payments would be roughly $3,250. After a five-year mortgage term, the remaining mortgage would be roughly $610,000.

As interest rates increase, home prices have been dropping 10 to 20 per cent. If we take 15 per cent off the price above, it will be $765,000. With a 20-per-cent down payment, this nets to a $612,000 mortgage. With an interest rate of 5.6 per cent, monthly payments will be $3,795. The remaining principal after five years is roughly $547,165.

Difference in monthly payments = $545
After five years, additional monthly payments = $32,700
After five years, difference in remaining principal = $62,885
Total five year savings buying at a higher rate, but lower price = $30,135
All paired with a much lower down payment.

Buying a home in a higher rate and inflationary environment is not ideal, especially with negative news cycles dominating headlines and scaring a lot of Canadians out of buying. However, it is wise to look deeper and uncover the financial opportunities many might be overlooking. Understanding the market and your financial situation, and consulting experienced mortgage and real estate professionals such as those on our team at Homewise is one step you can take to clear the fog and potentially invest in real estate at what many consider an inopportune time.

About Jesse Abrams

Jesse Abrams is Co-Founder at Homewise, a mortgage advisory and brokerage firm based in Toronto.

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