Do mortgage borrowers want short-term fixed rates?

Fixed-variable spread means 2023 trend shows no signs of slowing

Do mortgage borrowers want short-term fixed rates?

The popularity of fixed-rate mortgages with terms shorter than five years surged in 2023 – and that’s a trend that appears to have stretched into this year, with borrowers still gravitating towards those options.

Lower interest rates on the variable side at some point in 2024 appear inevitable as the Bank of Canada eyes a likely cut in the middle of the year. Still, the current spread between fixed and variable remains sizeable enough to convince mortgage shoppers that the former remains the best option, according to a leading Ottawa-based broker.

Chris Allard (pictured top), of Smart Debt Mortgages, told Canadian Mortgage Professional that the three-year fixed option remained the most popular mortgage type among clients in the opening months of the year, allowing them to lock in fixed rates while anticipating much lower rates at refinance time in three years.

“It depends on purchase or refinance and what the spread is between fixed and variable, and shorter term and longer term for the specific loan to value and transaction type,” he said. “But we’ve definitely been doing more three-year fixed than we ever have – three- and four-year fixed.

“And I think the idea as to why clients are doing that is that they’re kind of comparing three-year fixed in the low-5% range to variable rates in the low-to-mid sixes, and that spread is pretty hefty.”

Variable rates set to fall – but not imminently

While borrowers expect rates to come down, they would have to see quite a steep fall for variable to start outperforming a three-year fixed, Allard noted.

“Keep in mind that because the fixed rates are lower, it means qualification is easier,” he said. “By going variable, there are certain borrowers that would be essentially qualifying for less and suddenly not able to do the transaction they’re hoping to do. So by design, clients are going fixed because that’s what they actually qualify for.”

The picture for variable rates is undoubtedly improving, with Desjardins chief economist Jimmy Jean indicating in an interview with the Financial Post that the company expects Canada’s central bank to cut rates by 25 basis points at every meeting into 2025 after it makes the first rate cut.

That means the Bank’s benchmark rate, which leads variable rates in Canada, would sit at around half its current level by the end of next year.

Is it becoming more affordable to buy a home in Canada?

There was some rare good news on the affordability front for homebuyers in January as lower mortgage rates helped push down the income required to buy a property.

New analysis conducted by showed that while affordability remains firmly out of reach of most Canadians, the minimum income required to buy an average-priced home declined in 13 markets studied as the mortgage stress test ticked downwards that month.

Vancouver led the way with the minimum required income falling by $9,620, followed by Victoria ($7,890), Toronto ($7,800) and Ottawa ($4,820). Hamilton, Montreal, Calgary, St. John’s, Edmonton, Halifax, Fredericton, Winnipeg, and Regina also saw income requirements decline.

That said, the income required to purchase across most markets remains eye-wateringly high, a reality acknowledged by the federal government in its latest efforts to boost affordability and get Canadians into homes.

Last year it unveiled the First Home Savings Account (FHSA), a registered plan allowing new buyers to claim up to $8,000 in tax-free contributions to put towards the purchase of a home.

That’s a vehicle that’s increasingly being used in the Ottawa market by first-time buyers to take the first step on the ladder, according to Allard.

“We’re now starting to see some transactions where borrowers have put money away through their FHSA program. So it’s gained some popularity,” he said. “Historically, it’s been most first-time homebuyers just putting money in the RRSPs and using the RRSP program for downpayment, but now we’re seeing borrowers using the FHSA program.

“So I think that’s a positive thing that we’re seeing, educated borrowers doing the right thing. They’re trying to put money aside and the right investment vehicles for real estate purchases.”

Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.