One of the most daunting things about buying a house is the finances. Between negotiating the purchase price and handling surprise expenses like closing costs, home-buying money matters can be overwhelming.
With interest rates up, you may be wondering if home buying is still affordable. Learning the strategies for dealing with high mortgage rates will help you feel more confident going forward.
What Is a High Interest Rate for a House?
Interest rates are always in the news because of their wide-ranging impact on the economy and our everyday lives. But what is a high interest rate for a house, and when is it too high to buy? The answer depends on what you’re comparing the current rate to: historical rates, the rates other people are getting, or the rates you can afford.
What Is a High Interest Rate for a House Overall?
Overall, a mortgage interest rate of 8% or more would be considered high in today’s market. Under the current economic conditions, these guidelines apply:
- Below 6% is low to moderate
- 6% – 7.5% is normal
- 5% – 8% is borderline high
- 10% is very high by today’s standards
Historical context is important. Whereas 8% might seem astronomical, homebuyers in the early 1980s were paying over 20% in some cases. Fortunately, when rates do go up, they increase gradually, and it’s unlikely we’ll see anything like 1980s rates in Canada anytime soon!
What Is a High Interest Rate for a House Compared to Other Borrowers
An interest rate might also be “high” if it’s noticeably above what other borrowers are getting. Watch for this if:
- Your rate is 1% to 2% higher than the average for borrowers with good credit.
- You have a strong credit score, but your quotes are still above the market.
- You have stable income and low debt, but you’re being offered higher rates.
If this is the case, the rate isn’t universally high; it’s high for you. Since even a fraction of an interest point can add thousands of dollars to your loan over its lifetime, it’s worth investigating options. Try getting multiple mortgage quotes, look into your credit reports to see if there are errors, and ask lenders about the discrepancy.
What Is a High Rate of Interest for a House in Your Financial Situation?
A mortgage rate might be high given your personal budget and long-term plans, even if the rate itself isn’t objectively high. For example, a rate might be high under your current circumstances if:
- The payments stretch your monthly budget beyond what’s comfortable for you.
- Your income is variable, and you’re not sure if your payments will be within reach each month.
- The home you’re looking at is at the top of your price range.
- A higher rate makes your loan approval less certain.
If any of these ring true, the rate is high for you right now. That doesn’t mean you can’t buy a home; with the right strategies and advice from experienced professionals like a good real estate agent and financial planner, you’ll be on the path to home ownership.
Interest Rates and House Prices
If you’re thinking about how to buy a house in today’s market, you may be wondering, “Do higher interest rates cause lower house prices? If so, how does that play into my home-buying strategy?”
Interest rates can put downward pressure on home prices. When mortgage rates rise, borrowing is more expensive, and buyers can’t afford as much. Demand then decreases, forcing sellers to lower prices. However, the effect of interest rates on prices isn’t immediate, and it can be cancelled out by other factors that influence home prices, such as population growth, economic conditions, and demand in specific areas.
The bottom line? Don’t count on higher interest rates to cause lower house prices. Instead, focus on other strategies to find a house that meets your needs and suits your budget.
Strategies for How to Buy a House with High Mortgage Rates
Buying a home when mortgage rates are high doesn’t necessarily mean being house poor or spending years juggling debt. The key is to plan a solid strategy and execute it in consultation with your lender, financial planner, and real estate agent. Here’s how to buy a house when the numbers are tight:
Understand Your Budget
Be realistic about what you can afford by running the actual numbers. A mortgage calculator can be helpful; make sure you include your down payment, closing costs, and the “hidden costs” of home ownership.
Getting preapproved for a mortgage is the next important step. That will give you a better sense of what you can afford. With a preapproval, you’ll also be in a better position to negotiate your home price; sellers prefer deals that won’t fall through due to financing shortfalls.
Improve Your Financials
A key aspect of how to buy a house in any economy is to strengthen your financial profile:
- Improve your credit score by paying down debt, avoiding new credit cards or loans, and checking your credit report for errors.
- Increase your down payment if possible.
- Look for ways to improve your income or make it more stable.
Going into preapproval with these pieces in place will help you get a higher preapproval amount and a better rate.
Lower Your Loan Amount
A lower loan amount will make your monthly payments more affordable. You can borrow less by:
- Negotiating aggressively on price, with the help of your real estate agent.
- Saving for a bigger down payment.
- Getting a co-borrower.
- Thinking slightly outside your preferred area by exploring the surrounding neighbourhoods.
- Buying a home that needs improvements (taking into consideration the cost of the improvements).
- Using a first-time homebuyers’ program. In Canada, this includes the First Home Savings Accounts (FHSA), the Home Buyers Plan (HBP), the Home Buyers Amount (a non-refundable tax credit) and the GST/ HST New Housing Rebate. There are also provincial and municipal programs available in some regions
Explore Mortgage Options
When thinking about how to buy a home when rates are high, look into options like variable rate mortgages and longer amortization periods. You can always refinance later when circumstances change; you won’t be locked into the decisions you make today. Your lender can help you with options and long-term planning.
There’s no single best strategy for how to buy a home when interest rates are high. The right approach depends on your goals, your needs, and your financial circumstances. Working closely with experienced professionals like a real estate agent, financial planner, and lender can set you on a successful course to home ownership!
