We are a few days away from Halloween 2023 and I'm sure the good people at The Economist didn't choose this cover story lightly. (hope they don't mind me using their awesome image!) The same question is on many people's lips about the global housing crisis and the local housing market. There is no unequivocal ‘yes or no’ answer to the 'is it a good time to buy now' question. The decision to buy a residential property when mortgage rates are rising and markets are down-turning depends on several factors and your individual circumstances. We all know home buying (for yourself to live in) can be very emotionally taxing but for investors? They may be able to be less emotional but when people are leveraging their own home to buy other income property or they're playing the statistics, things can get quite emotional fast. Let’s dive right into some of the things you should very seriously consider before buying in this type of market. Here are some very level-headed, conservative considerations to keep in mind.
Financial Stability: What is your current financial situation? If you have a stable job, a great credit score and a healthy down payment (usually investments need 20% or higher down) saved. Okay, that’s the first step which goes hand in hand with considering what mortgage rate and amount you can 1. qualify for, 2. see if the monthly payment amount is not just affordable but comfortable, 3. if the rates keep rising how much more can you withstand with your current income? Note: a lot of people like to buy at their highest qualified amount (let's say $1 mil) but the monthly payments are super tight on your budget. If that rate goes up even a quarter percent will you feel panic set in? Point: you could look to purchase in the $800-900K range.
Long-Term vs. Short-Term: Consider your long-term plans. If you plan to stay in the home for a long time, rising interest rates may matter less since you can lock in a fixed-rate mortgage. If you're planning to sell the home in a few years, market conditions may be more important. If you’re planning to buy as an investment the average amount of time to hold it to let markets recover or rise is a recommended 5-7 years minimum.
Market Conditions: Analyze the real estate market in your area. In a downturning market, you might have more negotiating power and find sellers willing to offer more favorable terms. However, it's essential to do thorough research. Also, ask the sellers if they'd consider a ‘vendor takeback’ if they already have a mortgage term that is better than what you can get from a bank, this might be a good solution for the remaining time on their mortgage.
Affordability: Calculate whether you can comfortably afford the monthly mortgage payments at the higher interest rates. Be sure to include property taxes, insurance, and maintenance costs in your budget.
Future Rate Expectations: Even though no one has a crystal ball to see into the future, you can ask around to professionals, and like-minded individuals to find answers. You can research economic trends and forecasts online to get a sense of whether rates are likely to continue rising or stabilize. You can ask other investors (forums are great for this!), your bank, mortgage broker, check the news, and talk to your realtor for their predictions.
Opportunity Cost: Think about what else you could do with the money you're considering for a down payment. If you invest it elsewhere, either short-term or long-term, and earn a better return than the cost of the mortgage, it might make more sense to wait out the current storm but still have some growth while you wait.
Emergency Fund: Ensure you have an emergency fund in place (3-6 months of pay), so you can handle unexpected financial challenges without risking your ability to pay your mortgage.
Professional Advice: Consult with a financial advisor, real estate agent, bank, or mortgage broker. They can provide you with more personalized guidance based on your goals, current financial health, and local market conditions.
In general, buying a property either for personal or income purposes is a long-term commitment, so it's essential to make decisions that align with your financial goals and risk tolerance. Rising mortgage rates might make property less affordable, but that doesn't mean it's always a bad time to buy. Market downturns can create great opportunities for buyers, and in the long run, home values often appreciate.
You can also consider buying with a partner, being a silent investor, or turning your current home into a money-maker by renting out a portion of it to pay off your current mortgage and paying down your personal debt.
Remember that personal circumstances vary, and there's no one-size-fits-all answer. It's important to weigh the pros and cons, any and all options, and make an informed decision that aligns with your financial situation and long-term goals.
Colette Rabba
Real Estate Broker with International Realty Firm, Brokerage
in the GTA West.