Variable rates are expected to increase again after Wednesday's Bank of Canada announcement
The surging popularity of variable-rate mortgages continued in the second half of 2021, according to new data from the Canada Mortgage and Housing Corporation (CMHC), in a finding that will come as little surprise to the nation’s mortgage brokers.
A majority of Canadians preferred variable mortgages in the final six months of last year, the crown corporation indicated, with the popularity of those options rising by 19% (from 34% in the first half of the year to 53% in the second).
Still, although that trend continued into the early months of 2022, it appears to have “plateaued,” CMHC said, as interest rates started to rise.
Variable-rate holders are expected to face another sizeable increase to their monthly rate after Wednesday (July 13), with another oversized rate hike by the Bank of Canada – probably by 0.75% – seemingly on the way.
That would represent the Bank’s largest single rate hike of the year to date and the fourth consecutive increase to its benchmark rate. However, while it would also mean higher monthly payments for variable-rate holders, it’s unlikely to make those mortgages unaffordable for the majority, according to a prominent mortgage broker.
Leah Zlatkin (pictured top), LowestRates.ca expert and licensed broker, told Canadian Mortgage Professional that variable-rate holders would have been stress-tested at a level of either 4.79% or 5.25%, meaning that with the prime discount on their mortgage, their payments would still be lower than they had been tested at.
Read more: Residential mortgage debt continues to surge, says CMHC
Canada’s prime rate currently sits at 3.70% and would rise to 4.45% with a three-quarter-basis-point hike to the central bank’s benchmark rate on Wednesday.
That said, the country’s present uncertain economic climate could pose challenges in the future. Canadian unemployment fell to a record low of 4.9% in June, a record low – but the economy lost 43,000 jobs and observers including RBC have sounded the alarm on a likely recession in 2023.
That recession will probably be “moderate and short-lived,” RBC has indicated. Still, potential job losses are a more potent cause for concern than rate hikes, Zlatkin said.
“For somebody who experiences a change in their employment status, that’s when you need to worry,” she said. “You don’t really need to worry just based on rates going up. That’s not something that’s going to be [hugely] concerning for people.”
There is one homebuyer segment that Zlatkin said should be paying particular attention to the central bank’s action on rates: those who were preapproved at the previous rate before the Bank’s impending change.
That’s because the stress test requires borrowers to be tested at either 5.25% or their contract rate plus 2%, whichever is higher. With future hikes likely to bring variable rates close to 4%, that means a borrower who was preapproved at 5.25% may now have to qualify at closer to 6%.
“If somebody was preapproved at 5.25%, their budget might be $500,000 for what they can afford in a mortgage,” she said. “The change there is going to be that if rates go up, that same person may only get approved for [a lower amount].
Read next: Bank of Canada – could it pause rate hikes as market slows?
“For those people who may have a preapproval in their hand who are going out bidding on a house, you’ve got to really watch out if you’re going in firm around the 13th, or even those two weeks after.”
CMHC’s findings were revealed in its biannual Residential Mortgage Industry Report, which showed that borrowers had swayed toward variable-rate mortgages as discounts on those options surged.
The share of mortgages with variable interest rates plummeted between 2019 and 2020 as the discount narrowed – but that figure has crept upwards since, and with the discount on variable rates hitting close to 1.25% by the end of 2021, Canadians’ interest in those options soared.
Variable rates usually rise and fall in tandem with the Bank of Canada’s trendsetting interest rate, which the central bank slashed to a rock-bottom 0.25% as the COVID-19 pandemic took hold in March 2020.
It kept that rate resolutely low throughout nearly two years of the pandemic but increasingly signalled that rates would need to rise as inflation began to grow.
It introduced its first rate hike of the year at the beginning of March, increasing its benchmark rate by a quarter point, before announcing two further hikes of a half point each in its next two policy rate decisions.
