Canadian homeowners favor fixed-rate loans in the ‘higher-for-longer’ era

Canadian homeowners favor fixed-rate loans in the 'higher-for-longer' era

Toronto, Canada – November 24, 2023

The recent warning from the Bank of Canada, indicating that borrowing costs are likely to remain elevated for an extended period, has prompted Canadian homeowners to reconsider their mortgage strategies. With the economy showing signs of a slowdown, many are opting for fixed-rate loans to bring stability to their finances in the face of the uncertainty that lies ahead.

Recent market shifts have led to a scenario where the first interest rate cuts since March 2020 are anticipated as early as April, potentially reducing mortgage costs. Despite this, an increasing number of home buyers opted for fixed-rate mortgages in September compared to the previous year. Fixed-rate loans, currently offering some of the lowest rates, have become more attractive to homeowners seeking stability in their monthly expenses.

This trend is fueled by a desire for financial predictability, as homeowners are cautious about betting on lower rates in the future, having experienced the consequences of the Bank of Canada’s earlier prediction during the initial days of the “COVID-19 pandemic.”

The housing boom in Canada over the subsequent two years was triggered by Bank of Canada Governor Tiff Macklem’s affirmation in July 2020 that interest rates would stay low for an extended duration, causing Canadians to accumulate mortgage debt. However, “the central bank” has since raised the main interest rate to a 22-year high of 5% in July, prompting homeowners, facing over C$900 billion ($656.07 billion) in mortgage renewals over the next three years, to choose between fixed and variable rate loans.

Sophie Tremblay, an aviation professional from Montreal, reflects on the dilemma faced by many homeowners: “It is tricky… the banks are fully pushing us to go into a fixed and lock that instead.” The decision is particularly challenging for those with mortgages set to renew in the coming years, like Tremblay, whose current payments barely cover the interest on her five-year variable mortgage.

Recent statistics from Canada’s housing agency indicate a significant shift in mortgage preferences. While roughly half of new mortgages in early 2022 were variable-rate, that number dropped to just 6% in August 2023. In contrast, the share of fixed-rate loans among five-year and three-year mortgages rose to 68% in August compared to 32% a year ago.

In the first three weeks of November, 79% of Canadian mortgage seekers opted for a fixed mortgage, according to HanifBayat, CEO of financial data firm Wowa Leads.

National Bank analysts suggest that the acceptance of rates staying ‘higher for longer’ might lead more homeowners to lock in fixed rates and avoid uncertainty. BoC Deputy Governor Carolyn Rogers echoed this sentiment, cautioning that rates might not return to pre-pandemic lows due to increased geopolitical risks.

As the market anticipates potential rate cuts in the next two years, borrowers are becoming more cautious after recent rate predictions turned out to be inaccurate. However, the allure of variable-rate loans may persist, with borrowers weighing the potential benefits against the backdrop of evolving market conditions.

Analysts also speculate that banks, aiming to capitalize on bond yields retreating from their peak, may be incentivized to lock in customers at fixed rates, ultimately boosting profitability as rates continue to normalize in the coming years.

In this era of economic uncertainty, characterized by conflicting predictions and fluctuating interest rates, Canadian homeowners face a challenging decision-making process as they navigate the complexities of mortgage renewals.

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