Understanding how inflation shapes private mortgage lending rates requires a definition of the term. Simply put, inflation is the rate of price increases over a certain amount of time. Rising prices reduce the number of goods and services customers can buy with a certain amount of money in a specific period.
Keep in mind that some inflation is a sign that the economy is working properly. However, if it rises too fast the value of the dollar can drop. A recession can be the result or in a worst-case scenario a currency can become worthless.
The Bank of Canada works to prevent that. They try to keep the target rate for inflation at 2% a year. Private lenders aren’t exempt from the ill effects of inflation. Even the rates they offer are subject to the factors contributing to that financial issue.
What Factors Contribute to The Relationship Between Inflation and Private Mortgage Lending Rates?
Private mortgage lending rates are affected by the peaks of inflation. Here are a few things lenders consider when they are setting these rates.
- Housing Demand Can Be Affected. Goods and services cost more as inflation ramps up. That can make housing less affordable for families and individuals and drop demand. Reduced demand means there’s more competition for a smaller number of borrowers and that can lead to lower rates.
- Monetary Policy Can Change. Central banks raise interest rates to curb inflation. Private lenders can follow central bank trends as the rates go up. Here’s a historical overview of how Canada’s central bank has set that key interest rate since 1935.
Remember, private lenders operate differently than more traditional banks and credit unions. Quite a few of these alternative lenders work with mortgage brokers. The requirements are much more lenient with these private lenders. For example, many of them will approve loans on different properties that have at least 25% of available equity.
Overall, it’s good for people to know that interest rates and inflation tend to go in the same direction. It’s important to remember that there are lags until the end of a traditional term before rate hikes start to bite. Those differences are felt right away with a variable-rate mortgage.
The prime rate is the rate that traditional banks charge their customers. Currently, the Bank Of Canada is expected to hold the rate at 5% until Sept 06. Getting the full picture means understanding how lending institutions tweak their numbers after considering the prime rate.
How Do Lenders Adjust Mortgage Rates To Account For Inflation?
Inflation can benefit lenders in several different ways. For example, as prices climb more people will want credit to buy bigger ticket items if their wages don’t increase. This means new customers for private lenders that can adjust by charging higher interest rates
There’s a decrease in purchasing power when prices rise but wages don’t. People might need more time on a loan to pay off the debt so a lender can collect interest for a longer period.
However, there’s another side too. Higher interest rates can also mean fewer applications. That can mean lower rates as inflation takes a bite out of consumer’s spending.
Regardless of inflation and the interest rates there are some big benefits to choosing private lenders over traditional ones.
- A private lender can take a more tailored and customized approach to lending. For example, private lenders can streamline the process by overlooking flaws in your credit history.
- The private lending industry is more flexible because it’s not as regulated as traditional credit unions and banks. Here in Ontario, private mortgage lenders are regulated under the Mortgage Brokerages, Lenders and Administrators Act plus other regulations. These are designed specifically to make sure private lenders comply with disclosure requirements and consumer protection legislation.
If you’re shopping for a loan through a private lender you’ll find there’s differences between them and a bank. Basically it comes down to flexibility in the terms of the loan and interest and fees.
As far as inflation affecting the rates for both of these institutions and what they charge, there are some historical precedents.
In The 1990s
Hyperinflation besieged Russia after the fall of the Soviet Union in the 1990s. In fact, estimates put the real inflation rate in that period at more than 2,300% .
In The 1970s.
Mortgage rates hit a steady climb in the United States in the 1970s. According to Freddie Mac, they started out around 7.3%. By the end of 1979, the rates had peaked at 12.9%. America suffered through a recession during this period due to a number of factors like the 1973 Oil Crisis.
In The 2010s
Venezuela faced a similar hyperinflation problem in the 2010s. Political unrest led to economic turmoil and mortgage rates spiked as the country’s currency plummeted. Research points out that the inflation rate in Venezuela in 2015 was 181%.
Mortgage Broker Store specializes in several different mortgage-related products. Mortgage requirements that don’t meet traditional lending institution requirements are one of our focuses. We have private lenders, brokers, and licensed mortgage agents on the team. We can help you prepare for and get a private loan that will suit your needs.
Email ron@mortgagebrokerstore.com or call 416-499-2122.
