With the rising interest rates, housing affordability has never been more challenging for Canadians. Home prices are still at high levels despite interest rates rising. One option to help make mortgage payments more manageable is called an interest rate buydown. Let's review what an interest rate buydown is and how it can help make a home more affordable.
What is a Buydown?
An interest rate buydown is a financing option that allows a borrower to obtain a lower interest rate by paying a specified amount upfront. Depending on the amount paid, this option can lower your interest for the term of the loan or in some cases for a specific amount of time within the loan period. In the previous strong sellers market and low interest rate environment, an interest rate buydown was extremely rare. In the shifting market, a seller may be willing to contribute funds upon closing that help the buyer to arrange an interest rate buydown.
How Much Does a Buydown Cost?
The amount required to buydown the interest rate on a mortgage will depend on the amount you intend to take out, the current interest rates and what the lender is willing to offer. For example, a mortgage lender may offer a borrower the ability to reduce their interest rate by 0.25% in exchange for one percent of the total loan amount. So, if the borrower is obtaining a mortgage for $400,000 and is offered an interest rate of 4%, paying $4,000 would lower their interest rate to 3.75%.
Who Pays for the Buydown
An interest rate buydown is a great selling incentive in a high interest rate environment. Sellers may offer to buy down a buyer’s mortgage to incentivize the buyer to purchase their home. In these circumstances, the seller will make the one-time payment at closing that will go to the buyer's lender.
Review
Interest rate buydowns enable buyers to lower their monthly mortgage payments either permanently or in the first few years of their loan. By paying a fee upfront, buyers can reduce their interest rates, which can lead to long-term savings. This is especially beneficial if the seller or builder is willing to pay the upfront fee to secure a lower interest rate for the buyer.
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