With many of the major banks announcing a reduction in interest rates over the last few weeks, both home buyers and existing home owners will see the benefits in a range of ways in the real estate market.
For Homebuyers
When interest rates are lower, homebuyers can afford more expensive homes while keeping their monthly mortgage payments within budget. A lower rate reduces the cost of borrowing, allowing buyers to qualify for larger loan amounts, increasing their purchasing power.
A reduced interest rate means lower monthly payments, making homeownership more affordable. Lower monthly mortgage repayments can free up money for savings, investments, and other expenses.
When borrowing becomes more affordable, more people enter the market, increasing demand for homes. This often leads to higher demand and rising house prices, which can be a double-edged sword—good for sellers but potentially challenging for buyers in competitive markets.
Lenders consider a borrower’s debt-to-income (DTI) ratio when approving loans. Lower interest rates lead to lower payments, improving a buyer’s DTI ratio and making it easier to qualify for a mortgage.
Lastly, buyers who purchase homes during a period of low interest rates are already benefiting from lower borrowing costs, reducing the need to refinance later.
For Existing Homeowners
Refinancing when interest rates are low is something worth considering because it can help you save money in several ways.
A lower interest rate means lower monthly payments, freeing up cash for other expenses or savings. By securing a lower rate, you pay less interest over the life of the loan, potentially saving thousands of dollars.
If you can afford slightly higher payments, you might refinance into a shorter-term loan (e.g., 30-year to 15-year), allowing you to pay off your mortgage faster and save on interest. If you currently have a variable rate mortgage, refinancing to a fixed-rate loan during a low-rate environment provides long-term stability and protection against future rate increases.
When rates are low, you can also tap into home equity at a lower cost, using the funds for home improvements, debt consolidation, or other investments.
It’s also important to remember that refinancing comes with costs and fees, so it’s important to calculate whether the savings outweigh the costs. Often a loan exit fee may be an expense worth bearing if its cost is less than the money you’ll save switching to a better home loan rate with another bank – speak to your mortgage broker to consider all your options.
