“Transitory inflation” has proven to have much more staying power than the word transitory might suggest, and as a result many borrowers are seeing the purchase of a home grow ever more difficult—specifically, more expensive. For borrowers familiar with the unprecedentedly low rates of yesteryear, this can be extremely frustrating, or even feel unfair. However, these growing expenses aren’t coming from nowhere—inflation hurts lenders, too, and as margins grow tighter lenders are forced to increase costs just to stay in business. Let’s take a simplified look at what inflation does to our lenders.
What is inflation?
Inflation is “the decline of purchasing power of a given currency over time.” In other words, inflation, though it sounds like a paradox, devalues currency, which is why prices are going up everywhere, not just in the housing market. This affect’s everyone’s money supply, from borrowers to lenders, which means that lenders are also, effectively, losing money to inflation and the rising costs associated. Everyone is hurting!
In order to keep their doors open, lenders are led to look for ways to compensate for rising costs and devalued currency. Since lenders specifically make money through the mortgages that they offer, either by servicing the mortgage directly or by selling the mortgage to an investor (who is also being hurt by inflation), this impacts most lenders to raise interest rates and, sometimes, charge more in fees. Lenders try to limit this as much as they can because, naturally, borrowers are less interested in purchasing a home when rates and fees are high, but all lenders are still forced to do this to a certain extent to keep the lights on and the employees paid.
At the same time, demand for credit tends to increase when the value of money falls, because what people could once afford—or nearly afford—is growing further and further out of reach. (This can be tempered by the costs of credit rising as well.) So borrowers will keep trying to purchase homes, but will find it more expensive as a result. There is a light at the end of the tunnel for these borrowers: eventually, when inflation stabilizes and interest rates start to go down again, they will be able to refinance to a lower interest rate.
So what can borrowers do in the meantime?
Unfortunately, for some borrowers, the most financially responsible position is to hold strong and wait for rates to go down again—if you can’t reasonably afford a monthly housing payment at current interest rates and house prices, it just doesn’t make sense to try and force a home purchase. Other borrowers, however, may be able to afford a home purchase through the use of down payment assistance programs to help bridge the gap between what they have and what purchasing a home now costs. In either instance, just know that interest rates aren’t rising because of greedy lenders—if that were the case, interest rates would never go down when the market improves, and recent record-low interest rates would have never happened. Interest rates are rising because inflation hurts everyone.
To learn more about CBC Mortgage Agency’s down payment assistance program known as Chenoa Fund visit chenoafund.org.
This article should not be taken as financial counsel. Borrowers are always recommended to speak with a qualified expert before making any major financial decisions.