Canadian homeowners flee variable mortgages as interest rates rise

By
Millicent Wong
-
0
259
financial contribution

  1. property
  2. mortgages

The rush for adjustable rate mortgages intensifies for the 13th month in a row

Published on June 27, 2023 • Last update 2 days ago • 3 minutes reading time

A home for sale in Toronto. A home for sale in Toronto. Photo by Peter J. Thompson/National Post Files

As interest rates continue to rise, more Canadian homeowners are abandoning adjustable rate mortgages in favor of fixed rate alternatives.

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According to Statistics Canada, the proportion of variable-rate mortgages issued by licensed banks fell to just under eight percent for the thirteenth straight month in April. That’s down from January 2023’s 16.7 percent and well below a recent peak of more than 56 percent in January 2022. In dollar terms, the data shows total adjustable-rate mortgage payouts were less than $2 billion , a significant drop from the $23 billion recorded just a year earlier.

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According to James Laird, co-CEO of Ratehub.ca and president of mortgage lender CanWise, the waning popularity of adjustable-rate mortgages is indicative of a changing landscape in lending preferences.

“During the pandemic, mortgage rates hit historic lows, falling as low as 0.85 percent for a five-year variable rate and 1.39 percent for a five-year fixed rate,” Laird said in an email. “Adjustable interest rates became more popular than usual, accounting for over 20 percent of Ratehub.ca’s mortgage rate inquiries.”

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“With the Bank of Canada rate hikes and the general rise in mortgage rates, consumers have switched back to fixed rates, with 95 percent of rate inquiries at Ratehub.ca in 2023 being fixed rates,” Laird said.

Fewer people are now taking out mortgages overall. Total mortgage funding from licensed banks was $24.3 billion in April, down from a peak of $58.4 billion in June 2021 when interest rates were 0.25 percent, according to StatCan data showed.

According to the Canadian Mortgage and Housing Corp. (CMHC), eligible banks originated 67.5 percent of the loans in the market in the third quarter of 2022, up from 72 percent in the same quarter of 2020.

Canada’s interest rate has risen sharply over the past year and is now at 4.75 percent. Mortgage rates have followed suit, hitting their highest levels since early 2009, making it difficult for first-time homebuyers to qualify. In addition, those who renew their mortgage after a five-year term now have to pay higher interest rates than they did when they first bought their homes.

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Fixed-rate mortgages with terms of less than five years are enjoying increasing popularity.

“Consumers are more interested than usual in short-term fixed interest rates right now, as many experts expect interest rates to come down for years to come,” Laird said. “If borrowers get a short-term fixed interest rate, they can benefit from lower interest rates sooner in the future.”

Mortgage strategist Robert McLister believes this trend will not continue.

“My guess is that by next year (the popular choice) will be the exact opposite,” McLister said in an email. “Once the Bank of Canada indicates that its next step is likely to be a cut, the use of floating rates will increase. What we need to look out for is an increase in the likelihood of a cut at the next meeting. When you see overnight index swap market prices have over a 65 percent chance of shortening at the next BoC meeting, you’ll see floating selling picking up.”

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McLister added that he doesn’t expect that to happen in a few months – unless an economic crisis forces the Bank of Canada to act sooner.

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