Mortgage Rates are Amazingly Low

Unsurprisingly, many buyers are waiting for rates to drop from these “crazy rates” compared to just a few years ago when they were in the 2% range.

But the truth is that mortgage rates today are one of the most incredible bargains in history.

If you look at the historical charts you will see that the current rate of about 5% is quite low.

But will your brain let you see that?

Recency Bias is a common cognitive problem that all humans need to fight.

Recency Bias happens when the most recent events are the focus of our mind, and we forget historical evidence. The 2% mortgage rate is something that happened just recently and the explosive rise to 5% in comparison seems huge. But that is not true. Your brain is playing tricks on you.

If you look at the chart again, what do you think is the probability that mortgage rates will drop again into the 2% range?

A 5% mortgage is a great rate on average. However, it’s still a bit below the historical average of 5.78%.

In fact, mortgage rates have fluctuated from 2.79% in 2021 to 21.75% in 1981, just when I was starting to invest in real estate.

I believe that the probability of rates going up in the future is much more likely than rates dropping significantly. The importance of a mortgage rate is lessened by the greatness of the investment you are about to make.

If we assume that the rate of inflation is 5%, let me play for a minute and figure out what this means if mortgage rates were also 5%.

Let’s say you purchase a small investment property for $300,000 (I just saw one today in one of my favourite markets at this price). After all costs, including the mortgage, are paid, the property provides $750/month in cash flow. Let’s say you put $60,000 down, money you had saved and received from your family.

Your cash return on the $60,000 investment is 15%. Remember, you can depreciate the cost of the building, so most of that $9,000/year you are earning is tax-free.

Now let’s look at the inflation gain. If inflation is 5%, the value of that home in dollar amounts after the first year is $315,000, or a paper gain in my mind of another $15,000. It’s not money you get but the buying power of the investment if you will.

So, your $60,000 investment in that property results in a first-year gain of $24,000, or a 40% return on your investment. Even if mortgage rates are at 10%, this is a great investment.

So, in the end, a 5% mortgage rate today that you consider excessive is a trick played on you by your brain and Recency Bias. Fight through it and focus on the reality of what is likely happening. It’s never been a better time to take out a mortgage on a great investment property.