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  • Writer's pictureTeam Pinto

How to Buy a Waterloo Region Home in a Higher Interest Rate Environment

As interest rates rise, some homebuyers have stepped back from the Canadian real estate market to wait it out. But if Waterloo Region home ownership is something you aspire to, should you be following suit? Especially as homes are finally coming to market when there have been very few available recently? While the situation is different for everyone, it is important to keep the big picture in mind, something we are going to take a closer look at here.

Taking Advantage of a (Small) Housing Stock Increase

You only had to glance at the news over the last few years to know that Canada in general has a housing stock problem. So much so that at the start of the year the government put a legal freeze on foreign investment in residential real estate in an attempt to increase the number of homes available for Canadians to buy.

Here in the Waterloo Region, 2023 has seen a small increase in the number of homes available for sale. Not a huge increase, but there are more homes on the market, giving those who lost out in bidding wars recently, or who stayed out of the market because they believed there was nothing available, a chance to achieve their Waterloo Region home ownership goals.

As interest rates have risen though, some homebuyers have stepped back from the market to wait it out. However, it is important to keep the big picture in mind.

Doing the Mortgage Math

A mortgage typically lasts 25 to 30 years, with interest rates fluctuating throughout. For the past 30 years, the average 5-year conventional mortgage rate has been 6.46%. Knowing this helps you prepare for what you will most likely be paying for your mortgage for the rest of your life. Rates today remain very low when compared to the average mortgage over the last 30 years. When doing your mortgage math, keep this in mind.

Consider the following facts:

Interest Rate Peaks

In 1981, the Canadian Bank Rate reached an all-time high of 17.93%.

In 1981, the 5-year conventional mortgage rate reached an all-time high of 18.38%.

Low Interest Rates

In 2009, the Canadian Bank Rate was at an all-time low of 0.65%.

In 2021, the 5-year conventional mortgage rate was at an all-time low of 4.79%.

Why were interest rates so high in the 1980s? With baby boomers joining the workforce, oil prices surging, and high wage expectations pushing rates upwards, the early 1980s were fraught with runaway inflation.

Today's scene is very different. Mortgage rates rose in 2022-2023, but they remain far below the 18% rates seen forty years ago.

Will interest rates rise to previously unheard-of levels? This remains to be seen, but for the time being, we can say that an abundance of attractively low rates is continuing.

Affording a Waterloo Region Home in a High Interest Rate Environment

Mortgage interest rates have a significant impact on the affordability of purchasing a home. When interest rates are high, the cost of borrowing increases, making it more difficult for potential homeowners to secure financing for their dream home. In this article, we’ll explore some strategies that can help you afford a home even in a high interest rate environment.

Make a Larger Down Payment

One of the biggest factors that determine your monthly mortgage payment is the size of your down payment. The larger your down payment, the less you’ll have to borrow, which means that you can potentially secure a lower interest rate.

A 20% down payment is ideal, not just because it could score you that lower interest rate, but because it means that you will not have to pay mortgage loan insurance. As that usually costs 0.6% to 4.50% of the amount of your mortgage, this alone could save you money.

Consider a Shorter Loan Term

While a 30-year mortgage is the most popular choice, it may not be the best option when interest rates are high. Shorter loan terms, such as a 15-year mortgage, can result in lower interest rates and a lower overall cost of borrowing. Additionally, paying off your mortgage in half the time can free up more of your income and improve your financial security.

Get Pre-approved for a Mortgage

Getting pre-approved for a mortgage is an important step in the home-buying process. Pre-approval can give you an idea of what you can afford, as well as the interest rate you can expect to receive. This can also help you to negotiate with the seller and avoid paying more than you can afford.

Shop Around for a Mortgage Lender

Different mortgage lenders can offer different interest rates, so it’s important to shop around for the best deal. This is a step that many would-be homebuyers skip, mistakenly believing that every lender will offer the same rate, when that is not the case at all.

You can compare interest rates from several lenders and use online tools to estimate your monthly mortgage payment and the overall cost of borrowing, or consult with a mortgage broker to help you do so.

Plan to Make Additional Payments

Making additional payments can help you pay off your mortgage faster and reduce the overall cost of borrowing. If you find you have extra cash as your journey as a home owner progresses you can consider making extra payments to help reduce your interest charges.

Ask an Expert

To say the real estate market in Canada, including in the Waterloo Region, is changeable is not saying anything new. In the nearly a decade that Team Pinto has been actively involved as real estate agents in the Waterloo Region - and even as local residents before that - we've seen it change a great deal.

One of the best ways to determine if buying a home in the Waterloo Region right now is the right move for you is to talk to a local expert. Your unique situation - your income, your real estate goals, your current living situation, your future plans - means that what will work for someone else may not work for you, and vice versa.

No one should consider home ownership, anywhere in the world, until they are ready to deal with the responsibilities that come along with it.

But if you have been doing all the right things - working hard to improve your credit, saving for a down payment, reducing unnecessary expenses, sticking to a general budget -and you felt you were ready to start exploring Waterloo Region homeownership last year then the chances are that you are still in a position to do so, and with available stock - which will decrease again when interest rates fall and those sitting on the sidelines right now get off the fence - this could be the perfect time for you to buy.

One of the best ways to find out for sure? Ask an expert. As a local real estate team, at Team Pinto we are happy to speak with would be homebuyers and have an honest conversation to help you decide your next move. Ready to get that conversation started? Contact us right here.



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