While the interest rate that a person receives on a loan depends largely on their credit score, the average interest rate available to lenders will depend on a number of economic and political factors. The movement of these interest rates has a number of wide-ranging effects. Among these is whether prospective home buyers choose to lease or buy their residences.
Rise in Interest Rates
A rise in interest rates makes taking out a loan more expensive. As the interest rate increases, the amount of money that a borrower must spend paying interest on the principal of his loan will increase also. This can dissuade people from taking out loans, such as the mortgages necessary to purchase most homes, and encourage them to save their money, to allow it to collect interest.
Fall In Interest Rates
A fall in interest rates will generally encourage people to take out more loans, as the price of taking out the loan will drop. This is because the person may be able to lock in a lower interest rate on a fixed-rate loan -- a loan where the interest rate never changes. Also, low interest rates provide an incentive for people to take their money out of their savings, as they are collecting less interest.
Leasing vs. Buying
Generally, when interest rates rise, prospective home owners are more likely to lease homes, as they will be forced to pay more in interest rates on mortgages, making leasing appear a better option, at least temporarily. When interest rates are lower, borrowers will be more likely to buy homes, as they will be able to secure a mortgage at a lower price.
Considerations
The decisions made by borrowers may vary depending on their reasoning. For example, when a person leases a home, he is not building up any equity in a property. Therefore, the person may choose to take out a home loan even when interest rates are high because then he is at least purchasing a property rather than paying a landlord.
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