Variable rate hikes have grabbed headlines – but fixed rates are also on the up
The rise of variable rates after the Bank of Canada’s latest hike has been much publicized – but fixed rates are also on the move, having ticked upwards ahead of that increase.
After plunging well below the 3% mark at the onset of the banking turmoil that gripped US financial markets in March, five-year Government of Canada bond yields – which heavily influence fixed rates – have climbed steadily since the middle of May.
Plenty of borrowers have been eager to switch their variable-rate mortgage to a fixed one with the prospect of further Bank of Canada hikes ahead, but many are also having second thoughts because of higher fixed rates, according to a prominent Ottawa-based broker.
Chris Allard (pictured top), of Smart Debt Mortgages, told Canadian Mortgage Professional that some borrowers on longer-term variable options appeared more reluctant to lock in a fixed rate in the current market, even though many were considering doing so.
“For all the customers who are calling specific to their variable, I’m still not seeing a large amount of them switch to a fixed rate, specifically the ones that have the four- and five-year terms,” he said. “They don’t seem to pull the trigger to make the switch to a fixed rate.
“But I’ve seen more serious discussions these days around wanting to switch. Before, it used to be a bit more of a conversation piece, they wanted to check in with me. Now they’re saying, whether they think rates are going up or down moving forward, ‘I can’t really handle payments that would be much higher than this, so maybe I just have to make a change.’”
Borrowers with two or three years left on their variable contract are most inclined to make the switch, Allard said, because they can usually switch to a three-year fixed without penalty and those options often have a healthy spread over the variable.
In contrast, those who aren’t comfortable signing on for a five-year fixed option are often asking whether it’s worth paying the three-month interest penalty to take a three-year fixed.
TD said the Bank of Canada would hike interest rates by another quarter-point in July in an attempt to strike a balance between doubling down on inflation and easing the economy into a soft landing.https://t.co/jY0Hl6vKgm#mortgagenews #inflation #ratehike #interestrates
— Canadian Mortgage Professional Magazine (@CMPmagazine) June 16, 2023
How is Ottawa’s housing market faring?
On the purchase side, the Ottawa market continues to tick along, Allard said, with properties often seeing multiple offers around or marginally over the asking price. “We’ve got some going with no conditions and some going with very tight conditions, and some with a typical conditional period,” he explained.
“We’re really seeing value in the clients working with realtors right now because they seem to be doing better than [others]… they have a better understanding of what is truly happening either for that specific price point, that specific neighbourhood, or the market in general.
“They seem to have a bit more of a smooth experience or at the very least just a better understanding of the dynamics and in many cases they seem to be able to make a better educated choice a bit quicker. In today’s environment, speed does matter a little bit.”
Queries and pre-approvals for first-time homebuyers remain solid, Allard said, although many are either availing of the so-called “Bank of Mom and Dad” or getting their parents to co-sign, a trend that’s developed in recent years and shows no sign of slowing.
“Certainly with these higher rates, it’s just added increases difficulty,” he said. “But the one benefit is because it seems as though there are more homes being sold with the conditions of financing, it’s opened up a bit of an opportunity for those first-time homebuyers who may find this process stressful.
“Fortunately, in many cases, they can put an offer with conditions. They’re not all going to get accepted, but you do win the odd one.”
What’s in store for Ottawa’s housing market for the rest of 2023?
While some observers expect the national market to cool as rates climb higher, Allard said he anticipated a healthy level of activity for the remainder of the year, particularly with demand expected to remain at a relatively elevated level.
“In Ottawa, the days on market [are] not very long for the average home being sold, which means that even in this rate-increasing environment, there are still people who need to buy and sell,” he said.
“And with the amount of new Canadians arriving, I find it hard to believe that the market will totally cool. It may not remain hot, but I don’t see it becoming a strong buyer’s market. I just don’t see how that would happen.”
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