Canadians have been slow to turn away from variable-rate mortgages despite a slew of central bank interest rate hikes since March. It’s an unusual trend that mortgage brokers chalk up to economic uncertainty, regulations and – for some borrowers – a need for flexibility.
As of August, variable-rate mortgages still accounted for 44 per cent of new mortgages, mortgage renewals and mortgage refinances, according to an October briefing by housing analyst Ben Rabidoux for Mortgage Professionals Canada, the country’s national mortgage broker industry association.
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That share was down from a January peak of 57 per cent but still twice as high as levels seen before the pandemic, according to the report.
And even after two more rate increases by the Bank of Canada, in September and October, some mortgage professionals report a significant share of borrowers are still choosing variable rates.
At True North Mortgage, for example, floating rates still make up 45 per cent of loan applications, according to CEO Dan Eisner. By comparison, the share of variable-rate mortgages in Canada has traditionally hovered around 30 per cent, he noted.
The near-even split between fixed and variable rates is especially unusual considering that the spread between the two types of rates has almost disappeared.
While fixed mortgage rates remain the same for the duration of the mortgage term, variable rates usually move up or down following interest rate adjustments by the Bank of Canada. With the central bank having increased its trendsetting rate by 3.5 percentage points since March, variable-rate holders have seen their interest costs soar.
As well, variable rates available on new mortgages, renewals and refinances are now almost on par with the levels seen for fixed rates. While borrowers usually pay more for the predictability of a fixed-rate mortgage, that premium has now virtually disappeared.
It’s a scenario that would typically send Canadians flocking to the security of fixed rates, Mr. Eisner said. This time, though, many are continuing to bet on variable rates.
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Choosing a floating rate may make sense if you believe interest rates will soon start to decline, said James Laird, co-CEO of financial products comparisons site Ratehub.ca and president of Ratehub’s in-house mortgage lender. If that happens, those who choose a variable rate today would see their interest charges decline, while those who opt for a fixed rate would be locked into higher rates for the duration of their mortgage term.
Mr. Eisner attributes the near-even split between fixed and variable rate mortgage applications at TrueNorth to borrowers’ uncertainty about the economic outlook.
Where interest rates are headed is “anybody’s guess,” he said. “There is no economist that actually has the right answer here.”
Another factor contributing to the enduring popularity of variable rate was, until recently, the mortgage stress test, Mr. Laird said. Earlier this spring and summer, when variable rates were still significantly cheaper than fixed rates (the spread was more than two percentage points in May), federal regulations gave borrowers an extra motivation to choose variable because the lower rates allowed them to qualify for bigger loans, he said.
But the latest interest rate increase by the Bank of Canada in October virtually wiped out that incentive, bringing variable rates virtually in line with fixed rates, Mr. Laird noted. At Rathub, the share of client inquiries about variable rates had dropped to 16 per cent in October, down from 26 per cent in August.
Samantha Brookes, CEO of Mortgages of Canada, anticipates more Canadians will choose fixed rates after the central bank announces what is expected to be another interest rate increase in December, which may push variable rates above fixed rates.
Still, Ms. Brookes is still seeing plenty of existing homeowners opt for variable rates. Floating rates are less risky for borrowers who have already made significant progress paying down at their mortgage principal, she said. That’s because interest charges make up a smaller portion of their monthly payment.
And variable rates offer homeowners the option to refinance their mortgages in the future without the steep penalties fixed-rate borrowers often have to pay for breaking their mortgage, Ms. Brookes said. For homeowners with plenty of equity, refinancing, or borrowing more against the house, could free up emergency cash in a recession, she added.
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Erica Alini