Variable-rate mortgages growing in popularity despite Bank of Canada rate hikes
08 Sep 2022
Are Canadian homebuyers playing a game of chicken with the Bank of Canada? It could be.
Many are still interested in variable-rate mortgages even though the central bank continues to hike interest rates in an effort to quell inflation, according to a new report by Ratesdotca.
Queries regarding variable mortgages on the lending comparison site made up 59.1 per cent of all quotes in July, compared with 40.9 per cent for fixed rates. Mortgage queries overall dropped, but interest in variable rates fell just two per cent compared to 20 per cent for fixed rates.
Those looking to borrow for a home could be banking on the Bank of Canada pausing its rate hiking campaign after another expected increase on Sept. 7, echoing a theory posited by at least one analyst at CIBC.
Howevever, the Ratessdotca report cites the mortgage stress test as a possible reason for the increased interest in variable mortgages since the qualifying rate is lower.
The stress test requires that a homebuyer shows they are able to afford payments at a rate that is two percentage points higher than the negotiated interest rate, or can manage the Bank of Canada’s current qualifying rate of 5.25 per cent, whichever is higher.
“Normally, it is predominantly fixed compared to variable,” Dan Eisner, chief executive of True North Mortgage, told Ratesdotca. “For the last few months, it’s been strongly variable versus fixed, with the qualifying rate being lower for variable, but as prime goes up, that qualifying rate goes up.”
Homebuyers and lenders have been in a whirl since March, when the central bank pulled the trigger on the first of four rate increases thus far to bring its overnight lending rate to 2.5 per cent from 0.25 per cent. Markets are expecting another increase of 50 to 75 basis points at the September meeting.
Variable rates, which are tied to the Bank of Canada benchmark, have been rising in lockstep with the rate hikes.
The average variable-interest rate quoted on Ratesdotca in May was 2.28 per cent, 2.72 per cent in June and 3.19 per cent in July, while the average fixed-interest rate quoted in May was 3.98 per cent, 4.32 per cent in June and 4.8 per cent in July.
The current average variable rate in Ontario stands at 3.5 per cent versus 4.34 per cent for the five-year fixed rate
This doesn’t mean Canadians have sworn off fixed-rate mortgages.
The latest data from the Bank of Canada indicates that as of June, Canadians were still drawn to fixed-rate mortgages, which represented 51 per cent of new residential loans. Almost a quarter (22.8 per cent) of those loans were for fixed-rate mortgages with a term of five years and up. The remainder had terms varying from less than one year to three to five years. Meanwhile, variable rate mortgages accounted for 49 per cent of funds advanced for new loans by chartered banks.
With the housing market in flux and inflation continuing to pressure household budgets, it’s no wonder potential homebuyers, or those in a position to renegotiate, will look for ways to save on what is for many the largest purchase of their lifetimes.
