The real estate market will be hard hit if mortgage credit is not made available to buyers. Initially residential mortgages were offered on a short term basis with fixed rate interest. The regular payments covered only the interest and the entire principal was due to be paid at the end of the period of the loan. Most borrowers found it difficult to repay such debts. Default was inevitable and as a result there was a decrease in new constructions and the housing market had touched unbelievable lows.
In order to improve the situation, private lending institutions like banks and mortgage companies pitched in with long-term loans with affordable rates of interest to suit middle and low-income household budgets. But the current high rate of mortgage interest is likely to put pressure on home prices, which in turn will result in fewer transactions in the real estate sector. Even buyers who have enough cash would think twice and make purchases only if they have to, due to the prevailing lending environment.
In case the investment is in commercial real estate like office buildings, malls and hotels, it would be necessary to apply for commercial real estate loans. While applying for a commercial real estate loan, the loan amount is decided depending upon the income that the commercial property is likely to generate, and the capacity of the borrower to repay the loan. Past income history of the property is also taken into consideration before the loan amount is approved.
But today, Banks and other lending institutions have tightened up their lending standards, as they are unable to withstand the risks of huge mortgages. Even if the borrowers make huge down payments and have good credit histories, unless they are able to show regular income, mortgage loans are had to come by. And banks that do approve such huge loans charge relatively higher rates of interest to compensate for the lack of demand by borrowers.
Banks are forced to review their loan system mainly due to an increase in defaults by borrowers. This results in a dampener for real estate financing and prices.