How Inflation Might Affect Interest Rates & Real Estate Financing

Are you looking for commercial loans in Los Angeles, CA? These loans can help finance your real estate project from the ground up. However, factors like inflation do impact the cost and availability of such lending. If you’re considering taking out a commercial loan to develop, buy, or upgrade property in California, read on for insights on how inflation might impact interest rates and real estate financing.

What Is Inflation?

Inflation is the gradual, steady increase in the cost of goods and services in an economy. It reduces the dollar’s purchasing power, meaning that a single dollar is currently worth less than it was in the past. As a result, consumers may be unable to buy what they could afford previously unless their incomes increase. This phenomenon impacts most markets, including commercial lending.

What Causes Inflation?

When a lot of money enters the economy at once, inflation is likely to occur. The money can come from any source, including borrowed money which the government injects into the economy as a stimulus. When people have too much money for a long duration of time, demand for commodities usually exceeds supply. Prices rise over time as a result.

Some analysts believe that the trillions of COVID-19 relief dollars that the U.S. government pumped into the economy in the recent past might cause inflationary pressures. Prices of consumer goods and services will likely rise, with the ongoing economic recovery functioning as a catalyst.

The General Impact So Far

A steady increase in prices for commodities is taking shape across different sectors. For instance, gas and groceries cost a little more today than they did a few months ago. Construction costs have also risen due to the higher prices for materials like wood. If this goes on for some time, an adjustment of the monetary policy may occur, impacting interest rates.

Inflation Effects on Interest Rates and Commercial Loans in Los Angeles

Too much inflation isn’t good for the economy as it affects the cost of living and overall growth. As the government moves to stem it, commercial property loans may become more expensive in the next 12 months or so. The Federal Reserve will be closely monitoring the situation. If the economic growth is too fast to the point where demand outpaces supply, the regulators may increase interest rates.

Higher interest rates will reduce the amount of money entering the economy, which will increase the cost of commercial loans and other commodities. If this happens, lenders may impose more stringent borrowing requirements on real estate investors. Good credit is generally an important factor when applying for expensive commercial loans.

Keep in mind that lenders recognize how inflation reduces the value of their money over a loan term. They’ll typically raise interest rates on future loans to recoup inflation-related losses. Even without a federal monetary policy adjustment, banks can still increase interest rates to a certain limit.

If you’re looking for real estate financing, now may be the right time to send in your application and get approval. Inflation hasn’t had a huge direct impact on commercial loan interest rates so far, but this may change in the near future.

Before you apply for real estate financing, you should consider market conditions like inflation and how they might impact the cost of borrowing.  For additional information on the commercial property loans market in Los Angeles today, get in touch with the team at Fidelity Mortgage Lenders. Contact us or give us a call at (800) 752-9533 to get started.

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