As many of us saw in recent years, the global pandemic kicked off a drop in interest rates and the cost of borrowing money was lower than it had been in a while. However now, as the economy heads towards recovery, rising interest rates are a reality with whispers of bigger increases on the horizon. This will affect not only mortgages, but also car loans, student loans, lines of credit, and credit card debt.  

The predicted increase comes after many homeowners have been happily securing lower interest rates throughout and enjoying homeownership to the fullest through what has been some of the busiest years in real estate. Now, this forecast has buyers, sellers, and homeowners on edge about what future interest rates will look like, how it will affect them, and what this means for real estate in Ottawa and the surrounding areas.

How Higher Rates Affect Homeowners
For homeowners, a rise in interest rates in the simplest of definitions will mean that more of your mortgage payment will go towards paying the interest on your loan, rather than the principal balance.

Those with variable interest rates know that their interest rates can increase and decrease multiple times during the term, and they will likely feel the increased rates sooner than those in fixed-rate terms. If you are wary about the changes that could occur to your mortgage payments in the coming months or years, be sure to touch base with your lender. Some mortgages have a convertibility option that may be better suited toward you if your financial situation has changed or if you are uneasy about how you may be affected.

For homeowners locked into a fixed rate, an increase in interest rates won’t affect your mortgage payments until it comes time to renew. At that time, your lender will have a new rate reflective of a variety of factors including:

• The current prime and posted interest rate
• The length of your mortgage term
• Type of interest rate you choose
• Your credit history
• Your earnings and employment status

Renewing with a fixed rate may mean locking in a higher interest rate than if you were to choose the variable option, however, it will ensure you keep the same payments to your principal over the term of your mortgage, which can be beneficial when market interest rates are expected to rise.

How Higher Rates Affect Buyers

For homebuyers, the suspected increase in rates may put pressure on them to ultimately make the move and lock in an affordable rate now. This reaction will be making for a busy spring season in Ottawa real estate, not unlike what we have seen in years prior. Depending on how much you end up borrowing from your lender, even a small increase in interest rates can add up over the lifespan of the mortgage, or the term you lock in to. If you are looking to buy, it is important to plan ahead to know what you can afford, and how to lock in the best possible interest rate for you and your family. Here are a few tips to follow when preparing to secure a mortgage:

• Ensuring a good credit history
• Prepare a larger down payment if possible(at least 20% to eliminate the requirement of mortgage insurance)
• Pay off credit card debt
• Save more (look into high-interest savings accounts)
• Increasing earnings (while this may be easier said than done, sometimes securing a second job or making a career change can be beneficial)

How Higher Interest Rates Affect Sellers
Sellers have been enjoying and benefiting off of the real estate market for the past few years as home prices throughout Ottawa and other Metropolitan areas have seen large increases. This has meant more money back on their investment, more capital, and more opportunities to upsize or downsize into something more comfortable. 

In many of the big cities, as interest rates rise, the sellers market may begin to wane and eventually level out. However, as Ottawa experienced a reverse bubble situation, market prices are where they should have been for some time and are expected to even see slight year-over-year increases again in 2022. Sellers who are looking to buy again, as with any homeowner, will face the reality of higher interest rates if they are still paying off a mortgage after the transaction is complete.

Real estate in Ottawa is gearing up and we are excited for an active spring season of helping our buyers and sellers navigate the market and make the move that is right for them. Remember, when it comes to buying a house, it is imperative to check with a broker or lender about the options available. Be sure to shop around and find the best rates available to you, as this can vary, and be as prepared as you can to enter into your mortgage agreement with your best foot forward.