What Do Higher Interest Rates Mean for Your Real Estate Business?
Experts predict that the Federal Research will hike interest rates to at least 4% by the end of 2022 and stay at that level throughout 2023. The catalyst behind the current rate changes is inflation, which happens when the cost of prices and services increases.
High-interest rates influence how much borrowers pay for financial products like mortgages, and these latest developments might impact realtors like you who are in the business of selling homes. In this guide, learn the answer to the question, “What do higher interest rates mean for real estate professionals?”
What Do Higher Interest Rates Mean for Borrowers?
Before this article can answer the question, “What do higher interest rates mean for realtors?” you should understand the immediate impact of rate increases on borrowers. When the federal government raises interest rates, borrowers typically spend more on interest payments on financial products. That might mean a borrower pays hundreds of dollars more for monthly repayments on a mortgage, which can impact their budget. It also can mean it takes longer to pay off a mortgage if a lender agrees to defer additional interest to later years. For example, high-interest rates might see someone finishing their mortgage in 30 years instead of 25.
People thinking about purchasing property might be unable to afford (or want to pay) additional interest payments on a mortgage. That can lead to fewer people buying properties and residential or commercial properties staying on the market longer than usual.
What Do Higher Interest Rates Mean for Realtors?
If fewer people can afford to pay high-interest rates on home and commercial property loans, realtors can feel the effects in the following ways.
Sellers might reduce the price of their properties to attract more buyers, but this can result in realtors receiving less commission. Realtors often charge 5–6% of the value of a property in commission fees. Here’s an example of how high-interest rates can impact your bottom line:
Say your commission fee is 5%, and you value a residential property in your area for $500,000. The federal government then hikes interest rates from 1.65% to 2.4% (like in July 2022). That’s an interest rate increase of 0.75%. Fewer people are now interested in the property, so the owner lowered its price to $450,000. When you sell the property, you make $22,500 in commission. You could have made $25,000 in commission if the government didn’t raise interest rates.
Selling a property requires more work if potential buyers can’t afford it. You might need to:
- Spend more time convincing potential buyers about the benefits of owning the residential or commercial unit and why it is still a good investment.
- Organize and host additional open house events to advertise the property and encourage potential buyers to make an offer.
- Put previously sold properties back on the market when potential buyers realize they can’t afford to make repayments because of interest rate hikes.
Selling homes during a period of high-interest rates can be challenging for realtors. You might not know when rates will drop again or whether they will rise further in the months to come.
Fewer Homes to Sell
Some sellers might not want to lower the price of their properties and decide to ride out the current interest rate crisis by taking their units off the market. That could lead to less property stock in your area. With fewer homes to sell, the commission you generate will drop, and you might not be able to provide buyers with the homes they are looking for.
If that happens, try not to panic. There will still be plenty of chances to sell property, but you might need to dig deeper to find the best opportunities. ProspectNow is an AI-generated tool that identifies properties likely to sell in the next 12–18 months. You can then contact the owners of these properties instead of waiting for them to contact you. ProspectNow provides a way to generate income from off-market residential and commercial units throughout the United States.
How to Sell Houses During a High-Interest Rate Period
High-interest rates don’t have to damage your real estate business in the long run. Here are some tips for dealing with the current developments:
Lock In Interest Rates Now
Explain to potential buyers that interest rates might rise again—as experts are currently predicting—and it might be beneficial for borrowers to lock in a rate with their lender now rather than wait any longer. If rates continue to increase, it could be long before a borrower can purchase a property.
Talk to potential buyers about looking at their monthly income and outgoings and reevaluating their budgets. A customer might be able to cut back on some expenses to accommodate monthly loan repayments with a higher interest rate. Reviewing a budget might mean a customer is changing their lifestyle. However, the trade-off is that the customer can purchase a property and generate more money in the long run, especially if the home is in a hot market. Here’s an example:
A customer applies for a 30-year fixed home loan worth $500,000 with a 6.3% interest rate and no down payment. That means the customer will pay $1,945 in monthly home loan repayments. Then the federal government raises interest rates. The same loan now has a 7.1% interest rate, meaning the customer will pay $2,129 in monthly repayments. The customer can try to reduce other expenses to account for the interest rate increase.
Find Other Lenders
A property buyer might be reluctant to shop around for cheaper rates after receiving a mortgage offer from a lender. However, another company might offer a less expensive rate, making it more affordable to finance a property. Applying for a mortgage with a second lender won’t necessarily damage a borrower’s credit rating if the borrower works with a mortgage broker who finds them the right product based on their income and financial status. You can recommend customers work with a particular broker that your business trusts.
Experts predict interest rates will rise again in the coming months, making mortgages less affordable for some borrowers. These changes impact realtors like you, resulting in less commission, more work, and reduced housing stock. You can help customers navigate the current mortgage crisis by suggesting alternative ways to finance their homes or directing them to a mortgage broker.
ProspectNow is the AI-powered tool that identifies properties likely to sell in the next 12–18 months, helping you discover new selling opportunities. View historical sales, valuation, and other insights that power your real estate business. Start your free ProspectNow trial!