Shorter-term mortgages favoured despite discounts, CMHC finds

By
Millicent Wong
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Given the ongoing uncertainty about the direction of interest rates, the behaviour of borrowers and lenders in the Canadian mortgage market has changed significantly. In anticipation of a possible decline in interest rates, both parties have adjusted their strategies, resulting in higher discounts on fixed-term mortgages and an increase in demand for shorter-term mortgages.

“Persistently high inflation and uncertainty about a possible Bank of Canada interest rate cut have had a dampening effect across the country in 2023,” the Canada Mortgage and Housing Corporation (CMHC) said in its Residential Mortgage Industry Report released Wednesday.

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Canada's mortgage debt reached $2.16 trillion in February 2024, up 3.4 percent from the previous year and the lowest growth rate in nearly 23 years.

The CMHC attributes the slowdown in mortgage growth to several factors, including high inflation and speculation about possible interest rate cuts by the Bank of Canada. As a result, there has been a slowdown in resale activity in the housing market and falling home prices in several regions.

“Despite increasing discounts, most borrowers remain unwilling to commit to the traditional five-year mortgage term because they are uncertain about the short- to medium-term mortgage rate outlook,” the CMHC report said.

However, the report suggests a possible turnaround, with higher home sales and prices expected in the coming years. The expected growth will be driven by falling mortgage rates, robust population growth and an increase in real disposable incomes.

“The rising discounts on fixed-term mortgages in the first two months of this year suggest that lenders are anticipating possible rate cuts from the Bank of Canada sooner than they expected last year,” the agency said.

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In July 2023, the Bank of Canada's interest rate was set at five percent, a level it has maintained for five consecutive announcements. The next interest rate announcement is scheduled for June 5.

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Meanwhile, CMHC reports a significant revival in demand for adjustable-rate mortgages, which accounted for 15 percent of all new mortgage lending by federally regulated financial institutions in February 2024, a significant increase from last summer's record low.

Despite the changed conditions, terms of three to five years remained the preferred option and captured the lion's share of the market. “They accounted for almost 40 percent ($9.0 billion of $23.0 billion) of all newly originated mortgage loans from federally regulated institutions in February 2024,” the CMHC said.

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