The Bank of Canada's rate cuts to date have failed to spur a surge back in favour of variable options
Recent months have seen variable rates in Canada fall for the first time in over four years thanks to interest rate cuts by the central bank – so with further drops on the horizon, is now the time for mortgage brokers to start nudging their clients towards variable options?
They may be on the way down, but rates haven’t fallen enough on the variable side to sway most borrowers towards those mortgage types, according to a prominent Toronto-based broker.
Paul Meredith (pictured top), of CityCan Financial, told Canadian Mortgage Professional that some homeowners and buyers remained wary of variable options because of how many mortgage holders were burned by an unexpectedly aggressive series of rate hikes by the Bank of Canada between 2022 and 2023.
While variable rates plunged at the beginning of the COVID-19 pandemic as the Bank dramatically slashed its own benchmark rate – and remained low until early 2022 – an alarming surge in inflation spurred the central bank to introduce a spate of increases totalling 475 basis points in the course of just more than 12 months.
That trend, which spiked mortgage costs for scores of homeowners, has led many borrowers and hopeful buyers to take a cautious approach to certain mortgage types, according to Meredith. “People are still shying away from variable rates,” he said. “I think variable rates have kind of left a bad taste in people’s mouths because what was expected to happen over the last four years didn’t exactly happen.
“In 2020 [when rates were low] we were expecting maybe four to five standard-sized hikes of a quarter percent – and then we got substantially more than that.”
Why are borrowers still gravitating towards fixed rates at present?
Three consecutive 25-basis-point cuts by the Bank of Canada have seen top banks follow suit by lowering their own prime rates, although they remain high compared to the levels seen during the pandemic.
That means shorter-term fixed rates, which allow borrowers to hold their mortgage rates steady while keeping an eye on the prospect of further drops on the variable side down the line, remain the most popular options, according to Meredith. “Even though rates have fallen, there’s still a very large premium that you’re going to pay for a variable-rate mortgage,” he explained.
Even with interest rates trending downwards, and the income required to purchase an average home across the country declining slightly, Canada’s overall housing affordability outlook remains dismal.
— Canadian Mortgage Professional Magazine (@CMPmagazine) September 6, 2024
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“So because of that, people are still a little hesitant to go with the variable-rate mortgage. Eventually [it might] regain its popularity, but we’re just not quite there yet. I would say it’s 90% [customers choosing] three-year fixed right now.”
While fixed rates are still trending much higher than their pandemic lows, they’ve dipped in recent months amid a slowing labour market and darkening economic outlook. Five-year Government of Canada bonds, which heavily influence fixed rates, have fallen from a peak of just over 4.3% in October to around 2.74% at time of writing, with further declines potentially on the way.
Is the variable-rate outlook likely to change in the coming months?
Those rate cuts haven’t moved the needle much on the fixed-vs-variable debate – and nor have they convinced many prospective buyers to step off the sidelines in major markets.
Royal Bank of Canada (RBC) said in a recent analysis that a “largely muted” reaction appeared to have followed the central bank’s rate drops to date, with only small increases apparent in cities including Toronto, Vancouver, Montreal, Calgary, and Edmonton.
That’s a trend that will likely show little sign of shifting, according to the bank’s assistant chief economist Robert Hogue, until further moves by the Bank of Canada arrive. “It will clearly take deeper rate cuts to stimulate demand in a material way,” he noted in the report, “as buyers continue to contend with high ownership costs and poor affordability.”
For mortgage professionals and borrowers alike, the good news is that those cuts are likely on the way. The Bank’s language in its most recent rate decision suggested that it’s set to continue trimming rates – and surprisingly weak economic data over the past few months means it may even be able to move aggressively.
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