How Interest Rates Affect The Real Estate Market
What Is An Interest Rate?
When it comes to understanding interest rates, is key to making financially smart and stable mortgage decisions. To start off with let's briefly touch on what an interest rate actually is. In simple terms, an interest rate is an amount that a borrower of money is charged for the privilege of being able to take out said loaned money from an institution. For example, when taking out a loan for a mortgage or a downpayment, or when using a credit card, there is an interest rate attached to the loaning of that money. The interest rate is charged usually as a percent like 1.5% of the total amount loaned. When it comes to Interest rates on mortgages they are often determined by a number of factors, including the state of the economy and your own personal circumstances, such as your credit score and financial history. When trying to forecast interest rate changes on adjustable-rate mortgages, looking at the shape of a yield curve can help with future determinations.
Impacts on Real Estate
There are many things that affect the real estate market, from interest rates to demographics, the state of the economy and any related government policies or subsidies. As such when interest rates increase, usually during periods of economic expansion, a multitude of unique asset classes react differently. Rising interest rates can cause an erosion of the principle of bonds, as well as affecting the value of stocks, and other financial assets and can affect interest payments on debt. Despite this, real estate investments tend to have the characteristic of performing well in an environment of rising rates. Specifically, real property that is multifamily and income-generating overall has shown a significant ability to grow net income throughout periods of expansion rather than those of securities and assets historically.
Mortgages
If you're in the market for buying a home with a mortgage it can be to your benefit to do some research on current interest rates in your area using a mortgage calculator. Mortgage calculators can be found online through institutions like Toronto Dominion Bank using a quick Google search. Changes in interest rates can greatly influence your chances of being able to purchase a residential property because the lower that interest rates drop, the lower the cost of obtaining a mortgage will become. This creates a higher demand for real estate, which raises prices.
It's important to consider that as interest rates increase so does the cost to obtain a mortgage, which lowers the demand and price for real estate. However, when looking at the impact of interest rates on an equity investment including a real estate investment trust, also known as an REIT, as opposed to residential real estate, the relationship can be seen as similar to the relationship between bonds and interest rates. When interest rates decrease, the value of a bond increases as a result of its coupon rate becoming more attractive, and when interest rates go up, the value of bonds correlatively go down. Similarly, when the interest rate drops in the market, the high yields of REITs become more desirable and their value will go up. When interest rates skyrocket, the yield on a REIT becomes less desirable and it pushes down their value.
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