Shorter-term options have seen a big uptick in popularity in recent times
Amid a rapid increase in borrowing costs and continued uncertainty on the interest rate outlook for Canada’s mortgage market, shorter-length fixed-term options have surged in popularity in recent times – and those mortgage types could remain a strong choice for borrowers in 2024.
That’s according to Jesse Abrams (pictured), co-founder and chief executive officer at the Homewise digital brokerage, who told Canadian Mortgage Professional that the possibility of significantly lower interest rates down the line could mean fixed terms of fewer than five years make sense for borrowers in the current environment.
“A lot of Canadians still feel very comfortable with five-year fixed rates as the go-to mortgage, [but] we’re seeing more and more look at two-year, three-year, and one-year fixed rates,” he said. “What I would say is: explore that option.
“Do some calculations with your mortgage advisor, even if it’s in a bank or [with] a broker or company like ours, and try to have some estimations that if rates do drop in two years to a certain level, what that rate would be and what the payment will be based on the lower and lower rate down the road.”
Even though those shorter-term options are likely to carry slightly higher rates, it could be worth it in the long run, Abrams said, because of the possibility that the borrower can ultimately capitalize on lower rates when that term ends.
Borrowers are likely to consider as wide a range of options as possible when renewing, accroding to Leah Zlatkin of Mortgage Outlet.
— Canadian Mortgage Professional Magazine (@CMPmagazine) January 15, 2024
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Shorter-term options remain popular amid continuing uncertainty
In its spring residential mortgage industry report last year, Canada Mortgage and Housing Corporation (CMHC) revealed that fixed-rate five-year mortgages had fallen to less than 15% of new mortgages originated as borrowers gravitated toward shorter terms.
That trend had faded somewhat by the fall, the national housing agency said, although the share of mortgages with terms of five years or higher remained low as consumers continued to steer clear of traditional terms.
Most crucial of all for homeowners and mortgage borrowers in the current landscape, Abrams said, is undertaking as comprehensive an analysis of their finances as possible to ensure that they’re setting themselves in good stead for whatever comes down the line for the economy and rates.
“The most important thing that someone could do when they’re renewing or refinancing their mortgage is looking at what they can afford and really focusing on their personal finances to make sure that they’re not underwater and putting themselves in a bad place,” he said.
“I think the key for customers right now is to get a full picture of their finances and their options rather than just making a quick decision.”
Simplification of mortgage process a big coming trend
Homewise recently launched its real estate arm, Homewise Real Estate, with a view to creating a more seamless and unified experience for borrowers whose journey is too often marked, according to Abrams, by having to engage with a disparate series of entities in the mortgage space.
That’s a trend he expects to see become more commonplace in the coming years as companies aim to simplify and expedite the mortgage journey for Canadians.
“To me, the key focus is: How can customers find ways to save as much money as possible?” he said. “So I think a trend that we’re going to start to see both in the large FIs and smaller brokerages and whomever out there is more aggregation of sources to create an easier experience for customers and to find them more savings overall.”
That’s especially important, he said, with lack of financial literacy a significant obstacle in the homebuying journey throughout Canada – meaning the onus is on stakeholders in the mortgage process to make the overall experience as simple, painless, and ultimately cost-effective as possible for borrowers.
“Homebuying and homeownership processes are exceptionally confusing, and that’s probably because we’re never taught about it in school, which is unfortunate,” he said.
“But I think that’s a trend that we’re hopefully going to see more and more over the next one to five years: an aggregation of services to improve the client experience and overall, just saving them time, confusion, and hopefully saving them money.”
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