Rates are on the way down – so what’s in store for the mortgage industry?
After facing a barrage of interest rate hikes throughout 2022 and 2023, Canadians are slowly becoming accustomed to the recent trend of falling rates – although its likely impact on the housing and mortgage markets remains unclear.
As inflation spiralled upwards, the Bank of Canada spiked its benchmark rate by a total of 475 basis points over the course of roughly 16 months, with fixed interest rates also surging.
But with inflation now firmly perched within the central bank’s target range of 1-3%, it’s embarked on a rate-cutting path that included an oversized 50-basis-point reduction in its last announcement and sparked hopes that an uptick in homebuying and refinancing activity could be in the cards.
It’s still too soon to say for sure that the housing market is in recovery mode, according to Manulife Bank CEO Katy Boshart (pictured, top left), although the move towards lower rates certainly helps. “I think there’s a psychological impact of rates hitting a tipping point and then some of the customers that have been sitting on the sidelines waiting for the rates to go down will then start to re-enter,” she said.
“But the question is: are we going to see that notionally getting into the 3% range for a good five-year rate is the tipping point that then brings more people, and we really see the spike in demand?”
Boshart was speaking on a Lender Panel at the recent Mortgage Professionals Canada (MPC) conference in Montreal, which took place from October 26-28.
She said the pace of recovery could depend on how firmly the Bank of Canada moves in bringing rates lower. “I personally think it’ll be a bit slower in terms of how it [spurs] demand, and then we have to see when we bottom out on that rate,” she said.
Fixed mortgage rates have slid substantially since May, with five-year Government of Canada bond yields dipping amid a darkening economic outlook.
Tracy Gomes (pictured, top middle), Scotiabank’s senior vice president of real estate secured lending, questioned how much room remains for fixed rates to drop further. “The market’s already pricing in the Bank of Canada declining [its own rate],” she said.
Still, a host of factors – including media attention on the rate cut and the likelihood of further moves to bring rates lower – are keeping interest in the housing market steady. “I think there’s still a lot of pent-up demand on the sidelines,” Gomes said, “and I think once they make that transition and go out [to buy], we’ll start to see some of that probably pick up quite a bit.”
Are variable-rate mortgages set for a surge in popularity?
While the popularity of variable-rate mortgages plummeted in the face of the Bank’s aggressive rate-hiking strategy in recent years, the recent cuts – which have slashed its trendsetting rate by 125 basis points – have seen variable options reemerge as a viable option for many borrowers.
Devon Ajram (pictured, top right), vice president and national director of broker services at TD Bank, said the lender had seen a “marginal” increase in variable mortgage originations over recent months.
That’s been noted across most channels, even though the proportion of variable-rate mortgages is usually slightly more prominent in the broker space. “The broker channel’s always had a significantly higher propensity to sell the variable rate over the fixed rate,” Ajram said, “and that probably has to do a little bit more with the advice piece that I think brokers bring to the table in terms of how it is that you can use a variable to mitigate for either upside or downside risk, depending on what’s happening in the market.
“And I think right now, we’re seeing more deals being placed in the variable-rate mortgage because… there’s this narrative that’s been built up by the Bank of Canada where there’s anticipated rate cuts.”
TD currently expects the overnight rate to fall to around 2.25% by the end of 2025 – a possibility that borrowers are well aware of. “If customers actually want to play that downward cycle, a variable rate is an excellent place for your customer for a little while now, at least until maybe it’s time to put them into a fixed rate,” Ajram said. “So we’re seeing that profile go up slowly but surely, and becoming a more meaningful part of our mix.”
Justin Prasad of BlueShore Financial highlighted that, despite lower rates, current high borrowing costs and economic uncertainty have slowed the market compared to early 2023. https://t.co/mUmopKMLH3
— Canadian Mortgage Professional Magazine (@CMPmagazine) October 29, 2024
Nonetheless, borrowers are also often inclined to simply opt for the lowest rate at any given time – a factor that could well come into play as rates drop on both the fixed and variable sides, according to First National’s chief executive officer and director Jason Ellis (pictured below).
He recalled the trend seen during the COVID-19 pandemic, when borrowers gravitated overwhelmingly toward variable rates that were slightly lower than their fixed counterparts. “I think back to that inflection point when 85% of our applications were coming through adjustable rates. You could get a five-year fixed mortgage rate for about 1.90% and the adjustable rate was 1.75%, yet [a big majority] of the applications for the sake of those few basis points were coming in adjustable,” he said.
“Don’t forget that the next time we reach that inflection point. I find that there’s a behaviour amongst borrowers to choose the lowest payment in the moment, and that isn’t always the right decision – so it’ll be interesting to see how the dynamic changes.”
New government rule changes set to spur further demand
Another curveball set to be thrown into the mix when it comes to demand in the housing market: new rule changes arriving in mid-December, which will increase access to 30-year amortizations and increase the mortgage insurability cap.
For Louis-Francois Poirier (pictured below), vice president of retail lending, everyday banking and savings products at Desjardins, offering those extended amortizations to first-time buyers and purchasers of newbuild properties is a “positive change” that could nudge homebuying sentiment higher. “I think any government or policy change toward affordability is something that we’re highly in favour of,” he said.
But he also highlighted potential unintended consequences from the move, not least the prospect of prices jumping as a result. “One element that I’m curious about is if there’s going to be a negative impact of pushing buyers toward buying something [priced] a little bit more than what they can afford,” he said.
“So this is something I’m sensitive to – but what I’m a little bit more sceptical about is the impact on supply, which is supposed to be the first lever of this measure. In all honesty, I think any measure that increases demand without corresponding in an increase in supply will probably add lots of pressure on the prices. This one area that I’m sceptical about and will wait to see. But I think all in all, it’s a very positive change.”
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