Interest Rate is the proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding. As an investor, we see interest payment as our expenses in the mortgage repayment.
Recently, interest rates have been at all time low due to the ongoing pandemic. The question we want to ask is how does this affect us as homeowners, as well as investors. In this update, we will explain our view of what are the pros and cons of a lowered interest rate.
In the past, buyers who could only afford a $1 million property could now afford a $1.15 million property with the lowered interest rates. This is due to the fact that the monthly mortgage payments are also lowered together with the low interest rates. This has indirectly increased our affordability on the monthly mortgage repayment. However, this comes with the assumption that the buyer is able to afford the down payment as well.
From the perspective of a seller, having lower interest rates is advantageous. In this low interest rate market, sellers are now able to price their property 15% higher than the original selling price, as more buyers will be able to afford the monthly payments.
On the flipside, some buyers may purchase properties beyond their initial budget and this may become an issue when the interest rates increase in the future. Although we do not foresee a sharp increase in interest rates in the next 2-3 years, buyers who find difficulties in financing the property now may find it even more challenging in the future should interest rates rise. Hence as a precaution, do not overpay for a property just to take advantage of the low interest rate environment.