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Waiting for Interest Rates to Go Down Before Buying a New Home? Understanding the cost of Deferring Home Purchase to 2025

Considering the current economic climate, navigating the real estate market has become a confusing endeavor, particularly for first-time buyers looking to break into the market. With various opinions circulating, it’s natural to feel uncertain about whose counsel to take. Let’s
dive into the question that’s probably crossed the mind of numerous prospective new home buyers: Should you wait for interest rates to go down before making that big leap into homeownership?

Let’s acknowledge the elephant in the room…

The market and the economy are about as predictable as the weather. Interest rates, like the wind, can change direction quickly. So, trying to time your purchase based solely on the hope of snagging a lower rate is like trying to predict when the next thunderstorm will hit – it’s a gamble, and one that might not pay off.

Nonetheless, there is optimism on the horizon that the Bank of Canada will lower the prime lending rate at some point in 2024. The forecasts suggest a gradual and cautious trajectory. Given this scenario, prospective new home buyers may find themselves at a crossroads: should they await this anticipated relief or seize the opportunity to enter the market now?

Waiting for rates to drop might not be your best bet! Here’s why?

1. Opportunity Cost: Every day you spend waiting for rates to dip is a day you’re not building equity in your own home. Real estate has historically appreciated over time. The longer you wait, the more you might end up paying for the same property down the road.
2. Affordability: It’s true that lower interest rates will mean lower monthly mortgage payments. However, the cost to build a new home also is increasing. The result, home prices will rise. Once interest rates start to fall, it is expected more homebuyers will enter the market and home prices could rise even faster. While you might save money on mortgage interest, you could end up shelling out more for the actual property. It’s a bit of a catch-22. A more prudent strategy for the long term could involve committing to the house while maintaining flexibility with the interest rate. Marry the house, date the rate!
3. Risk of Missing Out: You’ve got to watch out for FOMO (Fear of Missing Out) in the current housing market resurgence. Good properties and lots are once again moving. While you’re sitting on the sidelines, waiting for rates to shift, your dream home and location might just get snagged by someone else.
4. Historical Trends: Reflecting on past trends, it’s clear there’s volatility of interest rates over time. While they may experience temporary declines, history demonstrates a consistent pattern of eventual upward movement. It’s the circle of (real estate) life. So, if you’re banking on rates staying low forever, this strategy will eventually leave you disappointed.

Understanding the Cost of Waiting Until 2025

Mortgage rates set by banks and other financial institutions are influenced in several ways, obvious the Bank of Canada (BofC) policy rate is a big determinant, but also are bond yields.

Personal influences such as credit score, loan-to-value ratio (LTV), down payment, and more, will also play a role in determining the interest rate offered to you.

Although the BofC rate cuts are anticipated at some point in 2024, their immediate impact on retail mortgages may be restrained, given that current rates already reflect expected cuts by the BofC. As of May 2024, interest rates have declined into the 4.75% to 5.25% range.

Waiting until 2025 to buy a new home based on potential lower interest rates many are not as advantageous as some expect. In 2023, the average price to purchase a newly built Single-Family home in Regina was $586,282. The price of single-family homes in Regina have increased by 5.03% annually, based on the compounded annual growth rate since 1991.

If interest rates decline by half a percent by 2025, the monthly mortgage payment will only be reduced by a few dollars, but a year of building equity in repayment of principal and appreciation could be in the thousands and thousands of dollars. See example below.

Proceed with an open mind…

Now, are we saying you should throw caution to the wind and buy a new house tomorrow, regardless of the interest rate? Not necessarily. Buying or building a new home is a big decision, and there are a lot of factors to consider. But if you’re sitting on the fence waiting for rates to drop, it might be time to reconsider your strategy.

At the end of the day, the best time to buy a home is when you’re financially ready and when you’ve found the design, location, neighbourhood, lot etc. that is right for you. Instead of playing the waiting game, why not start exploring your options today? Who knows, you might just find the home of your dreams sooner than you think.