Will fixed rate mortgages remain available as interest rates rise?
I am preparing to leverage invest in residential real estate for passive income. Buy and hold, cash flow is the priority over appreciation. Given that interest rates can, basically, only rise, I am concerned that lenders will not continue offering fixed rate loans at a time of uncertainty in the markets and interest rates. Do you think this is a reasonable expectation? I consider Real Estate to be in somewhat of a bubble right now and prices will soon come down. So, I prefer to wait before investing, but not at the expense of missing out on low interest fixed rates.
Of course fixed rate mortgages will be available. Rates will rise (or fall) in line with the bank's cost of funds and the level of consumer demand, but fixed-rate loans will not disappear.
Keep in mind that as soon as a bank closes a mortgage, they sell it (and many others closed at the same time) to third-party investors. These investors are willing to pay face-value for a loan with a fixed rate, but an uncertain maturity. So, don't worry that fixed-rate loans will be unavailable when you want one.
But think it over. Why would real estate decline in value? There are many reasons of course, but a principal reason would be cost of funding. If the price of a property declines to a point that looks attractive to you, but the interest on a loan increases commensurately, then the economics of that deal would be very similar. A large loan at a low rate would cost the same per year as a smaller loan at a higher rate.
I don’t believe you will see a freeze on fixed rate mortgages as interest rates rise. A few reasons why: 1) fixed rate mortgages are typically higher than adjustable rate mortgages. This means borrowers have to qualify for a higher mortgage payment showing greater strength of the borrower. This is good for banks as it pertains to their default rate. Historically, there is direct correlation with the rise of adjustable rate mortgage loans with the rise of loan defaults (as seen in 2009). This would be bad for lenders. 2) This would put downward pressure on the real estate market as a whole. Fixed rate mortgages act as a baseline cost of capital for both buyers and sellers. Whether selling their primary residence to relocate (and purchase elsewhere), or selling a rental property to reinvest in other real estate, without having a baseline for the long-term cost of borrowing upfront, to make a decision would be difficult, leaving both parties with a feeling of uncertainty. This act would more than likely apply downward pressure on home pricing while simultaneously slowing growth of the overall market. As far as investing in the rental market, there are several components to consider outside of the interest rate environment. I would advise speaking with a real estate professional in the local area you wish to invest in, to make sure you can “check” all the boxes. Currently, the “low cost of borrowing” box has a check in it. I hope this helps.
I would caution you not to make predictions as to the future price of anything. Rental real estate may be priced highly in your local market relative to the past, but that is not what matters. What matters is the unanswerable question; are the prices high relative to where they will be in years to come? No one knows. Don't ever let any market surprise you, it is altogether possible that the prices will continue to rise.
The same applies to mortgage interest rates. No one knows if they will rise or fall from current levels. Don't be surprised if they fall. It is true that the fixed rate mortgage carries less risk for you if the objective is positive cash flow for the long term.
I find it extremely unlikely that lenders will discontinue fixed rate mortgages. My advice is to actively seek attractively priced properties without regard for opinions as to whether real estate prices or mortgage interest rates will rise or fall.
Banks have offered fixed rate loans for a long time and I expect them to continue to do so regardless of the interest rate environment. Banks make their money by borrowing on the front end of the yield curve and lending on the back end of the yield curve. The difference in the rates is where they derive their income from. If you are looking to make an investment in real estate, ask yourself why, for what reasons, and what your expectations are. Real estate is illiquid, so if you ever need to sell in a hurry, you probably will have a tough time. As for bubbles, that's a tough one. Depending on where you live, some areas haven't fully recovered from the banking crisis of 2008 so it's difficult to make a general statement about the sector.