Variable Rate Mortgages, Fixed Rate Mortgages & Where Home Prices are Headed in Simcoe County: An Overview
The world of mortgages and interest rates can feel complicated, but it doesn’t have to be. Over the almost 20 years I’ve been selling real estate, I get asked how variable and fixed interest rates affect homebuyers, especially with the recent news about interest rate reductions and shifts in the bond market. This blog aims to break down how the policy interest rate affects variable rate mortgages, how fixed-rate mortgages tie into the bond market, and what we can possibly expect for housing prices in Simcoe County and the Barrie area over the coming months. Understanding Policy Interest Rates and Variable Rate Mortgages The policy interest rate, set by the Bank of Canada, is like the heartbeat of the financial world. It’s the rate that everyone chatters about on Social Media and News Networks. When the Bank of Canada raises or lowers this rate, it directly influences the interest rates charged by banks on things like credit cards, loans, and—most importantly for homeowners by way of variable rate mortgages. A variable rate mortgage is one where your interest rate fluctuates based on the Bank of Canada's policy rate. If the policy interest rate goes down, your mortgage rate will likely go down too, meaning you'll pay less interest on your home loan. This is why the recent 0.25% reductions in the policy rate over the last three announcements are good news for homeowners with variable rate mortgages. Starting in March 2022, the Bank of Canada began hiking the rate from its historic low of 0.25%, and by July 2023, the rate had reached a whopping 5.0%—its highest level since 2001. This series of rapid increases caused everyone with a variable rate mortgage to experience painful and higher interest payments on their mortgages right through June 5, 2024, when the first .25% rate drop was announced. Some relief is finally here with these cuts, and the consensus is more reductions are planned for October and December 2024. But what about fixed-rate mortgages? These types of mortgages don’t change when the policy rate moves. Instead, fixed-rate mortgages are influenced by a completely different mechanism—the bond market. How Fixed-Rate Mortgages are Affected by the Bond Market Unlike variable rate mortgages, fixed-rate mortgages are tied to Canadian government bonds, specifically the five-year bond yield. In simple terms, when the bond yield rises, so do fixed mortgage rates, and when bond yields fall, fixed rates tend to follow. (Yield is a term used to describe the % of return an investor receives on the price of the bond they invested in) Why? Bonds are considered a safe investment. When investors think the economy is going to slow down (for example, if interest rates are expected to drop), they buy bonds, which pushes the bond price up and the yield (the effective interest rate paid by the bond) down. Lower bond yields mean banks can offer lower interest rates on fixed-rate mortgages. Right now, Canada’s bond market reflects concerns about future economic conditions, which is why bond yields have been fluctuating but are generally trending lower. This has resulted in fixed mortgage rates becoming more attractive compared to earlier this year. The Relationship Between Interest Rates, Bonds, and Housing Prices Historically, when policy interest rates and bond yields drop, mortgage rates follow. Lower mortgage rates make borrowing more affordable, which encourages more people to enter the housing market. With increased demand for homes, housing prices often rise. It is important to remember that many factors influence housing prices, like supply and demand, local market conditions, and broader economic factors. At the time of this writing, markets across Canada are experiencing shortages in housing while, according to Statistics Canada, population has increased 6.8% between 2021 to 2024. In 2023 alone, Canada’s population grew by 3.2%, the highest annual growth rate since 1957! As such, these factors could play a critical role in keeping housing prices lower for some time. Traditionally, lower interest rates and bond yields have historically led to increased home prices, however, there is historical evidence in Canada showing that after periods of high inflation and high interest rates, followed by rate cuts, housing prices can continue to decline for a period of time. This trend occurs because it takes time for the effects of rate cuts to flow through the economy. Factors, such as consumer sentiment, employment rates, and housing supply, influence whether or when housing prices will recover. Additionally, after a period of rate hikes, the affordability gap created by high prices and interest rates can take time to close, meaning demand for housing may remain weak despite lower rates. So What Can We Expect for the Next 3–6 Months? If the current sentiment holds and policy interest rates continue to drop over the next few announcements, we can expect the following trends to impact the housing market: Variable Rate Mortgage Relief: Homeowners with variable rate mortgages may see their payments decrease further, putting more money back in their pockets. Attractive Fixed-Rate Mortgages: As bond yields decrease, fixed mortgage rates could continue to become more affordable, attracting new buyers and encouraging refinances. Increased Demand for Homes: Lower interest rates generally lead to more homebuyers entering the market, which could put upward pressure on home prices, especially in desirable areas like Simcoe County. Potential for Higher Home Prices, over time: If interest rates remain low and demand for homes increases, we could see some upward pressure on home prices, although the magnitude will depend on local supply and broader economic conditions, as noted above. In summary, the recent policy interest rate cuts and trends in the bond market are making both variable and fixed-rate mortgages more affordable. Historically, this kind of environment leads to increased demand and higher home prices. If these trends continue for the next 3-6 months, we could see more competition in the housing market, which would likely drive prices higher. If you're thinking about buying a home or refinancing, now is a great time to explore your options. Feel free to reach out if you have any questions or need guidance on navigating this evolving market!
Are Buyers In the Driver’s Seat Again? And What That Could Mean For You
Have you been browsing real estate listings, driving by homes for sale, or even visiting open houses with the dream of becoming a homeowner? If you’ve been putting off buying a home in the uncertain economic landscape, now may be the time you’ve been waiting for. After years of a seller’s market where it was difficult and sometimes impossible for buyers to find their dream home, the trend is shifting in the buyers’ favour. A local real estate agent can help you navigate these trends and find the right home. Why Now is the Time to Buy Home buyers may be aware that the Bank of Canada raised its benchmark interest rate to 3.75 per cent, which reduces affordability. What they may not realise is that some changes in the housing market are beneficial to them. After a couple of years where homes went off the market just days after being listed, they are now sitting on the market longer. Instead of selling in days or a couple of weeks, you see homes in some areas listed for more than a month. With it taking longer for the properties to sell, it leads to the seller lowering the price. Price reductions help out buyers who may have a tight budget. Rising prices have made everyone’s budgets tighter, which may mean that homeowners decide to sell if they have more homes than they can comfortably afford. More homes on the market also lowers the price, benefiting buyers. The Bank has raised its benchmark rate six times since March. With higher rates, buying a home today is often less appealing and more expensive than a couple of years ago. This leads to fewer buyers feeling confident in making a significant investment now, knowing that a recession could lead to job loss and even tighter finances. Fixed vs. Variable Mortgages If you're one of the home buyers looking for a property amid economic uncertainty, it's important to know which mortgage options are available as you try and figure out which is best for you. A fixed mortgage rate stays the same throughout the length of your term. A variable mortgage is immediately dependent on the Bank of Canada's rise and fall of interest rates. In the second half of 2021, most Canadians opted for a variable loan, but that has since changed. Buying a home, and choosing the right mortgage, is a deeply personal decision. It entirely depends on your goals, your unique financial situation, and how comfortable you are with risk. Ways to Reduce the Cost of Buying a Home You don’t have to let the rising interest rates keep you from buying a home now if you’re ready. You can take steps to make it easier to get an affordable loan. For example, make sure you have excellent credit to get the best interest rates. Come up with a larger down payment to reduce the interest rate on your mortgage. Because you’re assuming more risk, lenders are often willing to negotiate. Fewer buyers are willing to waive real estate contingencies, such as not having a home inspection. Sellers also set up contingencies, such as having financing in place before putting in an offer. All these real estate contingencies limited the pool of buyers competing for the same property. With the loss of these contract contingencies, it has levelled the field for all buyers. If you’re a first-time buyer, you have access to various first-time buyer programs. These programs provide you with assistance for your down payment. Ask your real estate agent for details that will help make your home more affordable. Home buyers can take advantage of the changes in the market if they are willing to adjust their expectations. You may need to consider living in another area or a smaller home if you want to buy now. Your real estate agent can help you find an affordable home that will suit your needs. We're Here to Help The key to buying is to be prepared and know which tools you want to utilize to make your home more affordable. We'd love to help you decide if now is the time to begin the home buying process. Let's Chat
A Closer Look At Simcoe County Real Estate
Unless you’ve been living under a rock, you’ve probably heard that the real estate market has taken a beating here in the second half of 2022. But what does that mean exactly? What are the real challenges people are facing and where are the opportunities? What is really going on here? So glad you asked..... Please have a read below as I shed some light on the darkness the media has been casting on Canadian Real Estate and Simcoe County more precisely. #1. Housing Prices Have Corrected, Not Crashed It was just a matter of time to be honest. What was happening this time last year was downright madness and entirely unsustainable. Something needed to change and it did. Around March of this year the shift began to happen. With every interest rate hike the BoC ( Bank of Canada ) announced the market slid further and back towards sustainability. What may have felt like a crash but was a correction. A normalization of housing prices and a balance between Buyer and Seller dominance. The prices were over inflated and now they have adjusted back to pre-pandemic numbers and we should see some reasonable growth year over year. What we found interesting, and you may be surprised to know, is that the average home sale price in Simcoe County has been rising every week since the middle of August. In addition to this, the ratio between the original asking price and the sale price of a home has gone up approximately 2% after falling incredibly from the peak. ( Peak = 117% of asking price. Lowest this year = 93 % of asking price. Now = 95% of asking price. ) The average price has stabilized around $780,000.00 which is up from the low this year of $751,000.00. #2. What About Interest Rates? The news of interest rates rising strikes fear in the masses and causes people to either rush in to beat the increases or throw the gear shifter into park and apply the hand brake. Mostly the latter. These rate hikes have done two things to our market. One, it's taken some people right out the market from an affordability standpoint as they can no longer qualify to buy the average home with the new rates. Two, many buyers are in a " let's wait and see how much lower prices are going to go " mindset and they are playing the dangerous game of timing the market. In all seriousness we are actually back to what is considered "normal" interest rates. They have been unusually low for so long now people have become used to them being that way and the rate increase feels uncomfortable. We are optimistic that these rate hikes are over and that there may be a couple more smaller increases before settling into some stability here. #3. So Is It A Buyers Market Or A Sellers Market? This chart below is an excellent illustration of the difference between a buyers, sellers and balanced market. Take note of the red and green horizontal lines. Anything close to or above the green line is an indicator of a strong, seller dominant market where home owners are in control and can command strong prices and the most favourable terms. Anything close to or below the red line suggests a strong, buyer dominant market where buyers can command the negotiations, get great discounts on pricing and control the terms more. You can see the journey we have been on and how we have moved back over the red line and towards a balanced market. A balanced market is actually a decent time to buy and sell real estate. As a seller you have to be competitive, price your home sharp and slightly ahead of the competition to ensure a reasonably short sale and get closer to your asking price. As a buyer you can shop around a little more. There are choices now and the competition to buy isn't as steep as it was during the peak. You can add into your offer favourable conditions like a financing clause, home inspection and even make your offer conditional on the sale of your existing home! Something we haven't seen in years. #4. You Can't Time The Market So many people we talk to have a struggling believe that they can actually time the market. This thinking is likening the real estate market to day trading the stock market. I will say this here once and loud!! YOU CAN"T BUY LOW AND SELL HIGH!! It's nearly impossible and it's foolish to think you can. This is your home. It's where you live. Is it an investment? Sure. We don't want to lose money on an investment, I get it. I would never advise someone to sell and lose or buy too high and lose. You only lose if you sell your real estate for less than you paid for it. Unless your business and majority of your income comes from buying and selling real estate, you should be buying or selling to change the quality of your life or the lives of the people you care about most. Its the only logical reason to do so. Is it time for a lifestyle change? Yes. Do you have equity in your home? Yes. Can you afford to buy the home you want and need? Yes. THEN GO OUT AND BUY THE HOME AND SELL YOUR EXISTING ONE FOR THE PRICE THE MARKET WILL PAY! Regardless of what the market is doing and especially if your plan is to stay there for a minimum of 5 years or more. Ignore the media and the negative press and STOP trying to time the market because you can't. #5. What's Next For Simcoe County Real Estate? Ah..... the magic multi-million dollar question. We don't know for sure but there are some clues and some predictions. If we look at the chart below you can clearly see that the inventory (amount of available homes currently for sale ) is beginning to shrink. You might ask, why? It's a combination of things including seasonality, some defeated home sellers that have not listened to what the market is telling them and have overpriced their homes, are cancelling their listings and giving up. The lack of new home sellers entering the market for concerns that now is not a good time to sell and move is also contributing to shrinking inventory. Many have bought into the media misinformation and fear mongering. What we do know, however, is that when inventory goes down, prices go up. It's the law of supply and demand. Now, the demand may drop for the short term as we head into the nasty winter months, but come spring people will want to move for changes in lifestyle and the demand will rise. So will the inventory but how much is the question? If everyone that is singing the " I'm going to wait until spring " song enters the market come March, April & May, we may actually see the market turn back towards a sellers market. Or at the very least a balanced market leaning towards a sellers market. So all those people who were waiting to see what happens and who thought the market was going to drop lower, will now end up in a competitive market with higher prices and less choice. If this prediction is correct, the best time to have bought real estate would have been back in the first two weeks of August this summer. With the lack of new home starts, a demand to live in Simcoe County for so many reasons and a possible tightening of the inventory, we feel it will be a strong market this spring. Have more questions? Now that you’ve read our blog post, you should have a better handle on whether or not it’s time to buy, sell or both. Whether the time is now or you plan on waiting a little longer, we're here to help. Let's Talk
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