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Optimism that interest rates will fall quickly is waning
Published on November 10, 2023 • Last updated 2 hours ago • 3 minutes reading time
Shorter fixed mortgage rates have become less attractive, a sign that optimism about an imminent decline in interest rates is fading, CMHC says. Photo by Jim Wells/Postmedia
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Canadian consumers are increasingly forgoing mortgages with terms of less than three years, a shift that Canada Mortgage and Housing Corp. (CMHC) as a sign of waning optimism about a rapid decline in interest rates.
Data from CMHC’s Residential Mortgage Industry Report released Nov. 9 shows that borrowers have begun to favor fixed-rate mortgages with terms between three and five years. Fixed-rate mortgages with terms between one and three years are now losing popularity.
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The change represents a reversal of a recent trend in which consumers are flocking to shorter-term mortgages because they believe interest rates could soon return to ultra-low levels seen during the pandemic.
CMHC data shows that as of August 2022, fixed-rate mortgages with terms of three to five years accounted for 14 percent of the residential real estate market. By August 2023, the segment’s share was 51 percent.
The share of mortgages with terms between one and three years also increased over this period – from 19 percent to 21 percent – but has fallen significantly since its recent peak of 36 percent in February 2023.
Variable-rate mortgages have also become less important, falling from a market share of 45 percent to just six percent over the same period.
“This preference is due to a significant discount offered by fixed-rate mortgages over adjustable-rate mortgages and concerns about further rate increases,” the CMHC said.
Since March 2022, the Bank of Canada has increased its overnight interest rate ten times. As a result, mortgage extensions during this period came with significantly higher interest rates.
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“In the first half of 2023, more than 290,000 borrowers with fixed-rate mortgages experienced a significant increase in interest rates when renewing their loans… the resulting increase in their debt service costs is placing financial pressure on these borrowers,” CMHC said.
While overall mortgage delinquencies have stabilized at historically low levels – just 0.15 percent recorded delinquencies of 90 days or more – delinquencies for borrowers with mortgage loans over $400,000 have fallen two basis points to 0 since the second quarter of 2022. increased 10 percent.
The share of borrowers with mortgages of at least $850,000 who are delinquent rose even faster, by three basis points to 0.13 percent, over the same period. For borrowers with smaller mortgages, delinquencies remained higher but remained at a consistent level.
The second quarter was also marked by significant year-over-year increases in both second (30-59 days past due) and third (60-89 days past due) mortgage delinquency rates, which is a concerning sign, according to CMHC.
“An increase in these early stages of the delinquency process suggests that borrowers are beginning to experience financial difficulty,” the agency said.
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This week, Bank of Canada deputy governor Carolyn Rogers said at a news conference in Vancouver that Canadians should be prepared for higher interest rates in the future.
“It’s not hard to imagine a world where interest rates are consistently higher than people are used to,” Rogers said.
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