This decision was made to assure that the Banko Sentral ng Pailipinas (BSP) can fulfill its mandate for price stability and to limit the impact of the most recent Fed rate hike on the country’s exchange rate. BSP believes it is necessary to preserve the interest rate differential that existed prior to that increase. In addition, former BSP Deputy Governor Diwa C. Guinigundo stated that matching the US Federal Reserve is very appropriate considering the BSP’s inflation forecast of 7.1-7.9% for October and 5.6% for the full-year average. The increase in BSP interest rates will cause an overall slowdown in economic growth because it would make it more difficult for consumers and businesses to obtain credit.
BSP to match US Federal Reserve Rate Hike
The Federal Reserve’s dismal battle against inflation has continued with the announcement of a further 0.75 percentage point interest rate increase. The economy, which has never steadied since the Covid-19 shock, is suffering from higher rates. In line with this, the Bangko Sentral ng Pilipinas (BSP) announced that it intends to raise its key policy rates by 75 basis points (bps) at its upcoming meeting, to match the most recent monetary tightening by the US Federal Reserve.
The increases are intended to slow an economy that had exploded after emerging from the 2020 coronavirus recession. An extremely hot housing market marked by record-high home prices and extremely low levels of inventory has been a part of this spectacular rebound. The housing market has, however, showed symptoms of weakening since late last year, with national price growth slowing and prices even falling in some markets. This proves that one of the many industries that will be greatly affected by the said rate hike is the real estate industry. Although it hasn’t manifested yet, experts say that there will be a possible lingering effect on the industry and its consumers. Higher rates present difficulties for both homebuyers and sellers, as the former must deal with higher monthly payments while the latter may receive fewer offers or less demand for their properties.
When the Federal Reserve increases the federal funds rate, the BSP interest rates generally increase throughout the whole economy. Rates on mortgages are no different. Let’s look at the following parts to understand how these rate increases affect homeowners seeking to refinance, sellers, and purchasers.
EFFECTS ON HOME BUYERS
Although there is no direct relationship between mortgage interest rates and the federal funds rate, they do tend to move in the same general direction. A rising federal funds rate consequently results in higher mortgage rates for buyers. This has the following effects:
1. INCREASED PAYMENT
Mortgage payments will increase when rates rise. This would entail allocating a larger portion of your monthly money to your residence.
2. LOWER LOAN AMOUNT
You end up being approved for a smaller loan amount. Lenders determine the amount of a preapproval on your down payment as well as the monthly payment you are able to make based on your debt-to-income ratio (DTI). You’ll have a smaller amount of debt you can manage because your monthly payment is larger. Because they lack the funds from the sale of a property to make up for a reduced loan amount with a bigger down payment, first-time buyers may be disproportionately affected.
3. DIFFICULTY IN FINDING AN AFFORDABLE HOUSING
It could be difficult for you to locate houses in your price range. It’s vital to understand that this may not happen immediately away. As rates climb, sellers often end up not boosting prices and may even drop them if they don’t receive offers after a certain amount of time. Currently, there is not enough inventory available on the housing market to meet demand, especially for existing properties. Pent-up demand might therefore support higher prices for a considerable amount of time. In the short term, some buyers might be priced out of the market.
4. MAKES YOU CALCULATE THINGS CAREFULLY
Consider carefully whether to buy versus rent. Even with higher rates, rent costs typically increase more quickly than mortgage payments when property values are rising as quickly as they are. Though every market is unique, it doesn’t harm to calculate the costs for your region.
EFFECTS ON THE HOMESELLERS
1. DIFFICULTY IN FINDING A NEW HOME
Finding a new home could be more difficult for you. The fact that there aren’t many options available on the market is one of the factors that makes your home so desirable and raises home prices as a seller. What you must understand is that even if you make a fortune on your home, you may end up spending a lot more to find another one. You’d also be paying a higher interest rate.
2. DIFFICULTY IN FINDING BUYERS
With higher prices, more people may be priced out of the market, which could result in fewer interested buyers. As a result, it may take longer for offers to come in on your home, and you may have to wait longer for it to sell.
3. DIFFICULTY IN SELLING YOUR HOME AT A HIGHER COST
The hardest part to predict is that your home might not sell for as much. Because there is so little available inventory, prices will likely stay high in many areas for longer than they would in a rising rate environment. However, the housing frenzy will come to an end at some point. When this happens, you may have to lower your price in order to receive offers.
EFFECTS ON HOMEOWNERS
1. FIXED AND ADJUSTABLE MORTGAGE RATE
A fixed-rate mortgage’s interest rate won’t change at all if you do nothing with it. In fact, the only variable that can affect your payment is a change in taxes and/or insurance. If your mortgage has an adjustable rate, there is a good chance that it will increase when it is time for an adjustment. Of course, whether this occurs and by how much is determined by the caps in your mortgage contract as well as how far your current rate is from market rates at the time the adjustment occurs.
2. DIFFICULTY IN REFINANCING
You should be aware that you probably won’t be able to refinance if you recently took out a new mortgage if you’ve done so within the past few years. However, one thing to keep in mind in this type of market is that many people have a lot of equity as a result of years of rising prices. This could be advantageous in debt consolidation, for example.
In order to keep inflation under control, the BSP matches increases in the federal funds rate. Although not directly related, higher interest rates tend to move in the same direction. People in the real estate industry must take extra efforts to stay in the game even with all the changes brought about by this rate hike.
However, if you are planning to buy a home, or sell your home the best things you can do is to find a good real estate agent. Working with a seasoned real estate agent can be the most effective way to navigate a difficult real estate market. Good agents can assist buyers in finding properties that are within their price range. They can also act as key negotiators on your behalf to secure a fair price and avoid overpaying for a home. Bria Homes can assist you in locating an expert real estate agent in your area who can align with your goals and act as an advocate on your behalf.
Written by Noelyn Kate O. Cabrera