There’s one thing that’s certain in life: interest rates will rise again after they’ve fallen. You may think that higher interest rates are not what you want (or need) when you are browsing the market for a new home, but they can be beneficial. And here’s why.
1. There’s Less Competition
When interest rates plummeted in 2020 because of the economic effects of the pandemic, many people took advantage and got their foot on the property ladder. But when interest rates climb, there are fewer buyers, therefore less demand.
This means that sellers have to price their properties sensibly to sell them easily. So, if you’re serious about buying, you’re more likely to get a good deal than when there are multiple buyers all vying for the same property and making prices rise artificially.
2. You’re Probably Okay
If you can afford your repayments at the peak of the cycle, it’s less likely you’ll really feel the pinch if the rate increases again. Most economists agree that we’re currently near the peak, with the possibility of another small increase soon. So if you’re not at the upper end of your limit now, you’ll probably be okay.
Though it’s always a good idea to pay as much into your mortgage as possible to reduce interest and cushion you against unexpected hikes. If you bought a house at a lower interest rate when it was valued at the maximum you could afford, you might be in for a surprise when rates spike. Always leave a little fat in your budget to protect yourself.
3. Higher Rates Mean Lower Prices
This might seem counter-intuitive, but higher interest rates usually result in a decrease in the prices of consumer goods. When interest rates decrease, people tend to have more disposable income.
This leads to more spending, taking out loans and increased credit card usage, but less worry about paying debts back. As interest rates rise, people spend less, which means that businesses have to encourage spending to keep their doors open, and may offer special deals.
The government increases the prime interest rate (the rate at which banks borrow money) to curb inflation and encourage spending. So, when interest rates increase, you may save money on your grocery bill, for example.
4. There’s More Stock
When there’s less demand, houses tend to stay on the market a bit longer, allowing room for choice. A decent amount of ‘stock’ on the market means that it is less volatile. When there’s too much demand and not enough supply, things get out of control and ‘bubbles’ form.
5. Tips To Work The System
Shop Around
Take heed of old-fashioned advice and don’t put all your eggs in one basket. The days of being loyal to your bank, and relying on personal relationships with the bank manager, are over. The more lending institutions you apply to, the better.
Betterbond CEO Carl Coetzee says that the more banks you apply to, the greater the discounted rate will be. The optimal number of banks to approach seems to be four. A mortgage originator will do the hard work for you and get you the best deal.
Keep Saving
If you have other investments, you’ll earn higher interest on those when rates increase. You could use this to offset your mortgage repayments, making your own money work for you. Don’t be tempted to cash in your savings unless you really have to.
Manage Your Debt
Find a credit card company that will help you group several short-term loans into one loan account that you can easily track. That way, you will avoid forgetting any repayments and getting charged penalty interest.
Look-Out For The Property Bubble?
A bubble occurs when there’s an increase in demand, limited supply and wild spending. When interest rates are low, people have access to more money, such as through loans, and prices increase as sellers want to make as much money as possible.
When supplies are depleted, demand decreases sharply, resulting in a sudden drop in prices, and the bubble bursts. People are left with properties they probably paid too much for but can’t sell without making a loss.
Words by Lynda Inghan-Brown
Illustration: Shutterstock
