How are borrowers adapting to the changing mortgage market?

Mortgage preferences are shifting as Canada's borrowing landscape continues to evolve

How are borrowers adapting to the changing mortgage market?

Canada’s housing and mortgage markets have seen a significant shift over the past year amid higher interest rates and cooler activity – and that’s resulted in big changes to borrowers’ mortgage preferences.

Variable rates plummeted at the onset of the COVID-19 pandemic as the Bank of Canada slashed its own benchmark rate, with borrowers rushing to capitalize on variable options throughout the resulting market boom.

However, a flurry of rate hikes by the central bank throughout 2022 saw the pendulum swing back away from variable rates and the current high-rate environment. That, coupled with the expectation that rates will eventually fall again at some point in the next year or two, has resulted in a surge in popularity of shorter-term fixed options.

That’s because variable rates are now notably higher than their fixed counterparts, but also because choosing a shorter-term fixed option means borrowers can avail of those lower rates in the near future instead of staying trapped in a longer fixed mortgage.

“If I put myself in the chair of a homebuyer today, I’d be wary of a five-year fixed rate. The two- and three-year rates are what I’m looking at personally as a homebuyer in this market,” Chase Belair (pictured top), co-founder and principal broker at digital mortgage brokerage nesto, told Canadian Mortgage Professional.

“If a five-year rate is a must, I would steer away from a big bank five-year fixed at all costs in the homebuying journey today, the reason being that there’s a strong assumption that the rates will be low [down the line]. I want to be able to take advantage of those lower rates; I do not want a mortgage prepayment penalty to outweigh any gains that would be available by opting for a new rate at that time.”

How many Canadians are still opting for five-year fixed or variable mortgages?

While around 90% of mortgage enquiries made to nesto in February 2022 were about a five-year fixed or variable term, Belair said that the popularity of variable options has dipped significantly since the beginning of the Bank of Canada’s rate-hiking trajectory.

Between 12% and 13% of enquiries to nesto are currently about five-year variable rates, he said, having sat at just 5% as recently as December.

The ability to remortgage when interest rates start going down in the coming years is a significant reason to opt for a shorter-term fixed mortgage, Belair said.

“In some cases, you’ll see the five-year fixed rate is actually lower than the two- or three-year fixed rate today,” he said. “But when it comes to the mortgage penalty, the odds of having an interest rate differential penalty on the five-year are very high, and the odds of having an interest rate differential penalty on the two- or three-year, versus the three months’ interest, are significantly lower.”

Where does value lie in the Canadian housing market?

While home prices have fallen precipitously in many markets across the country, affordability remains a steep challenge, especially for the first-time homebuyer cohort.

In nesto’s recent analysis of the best Canadian cities for housing affordability and job growth, Quebec boasted six of the top 10 spots, with Sept-Îles and Bécancour leading the way.

The former has an average home price of $204,042 with a lower property tax rate (1.15%) than the national average, while Bécancour’s average home sells for $206,748 with a property tax rate of 1.26%.

Quesnel in British Columbia, and Cornwall and Timmins in Ontario rounded out the top five, with each of those cities boasting an average home price of less than $213,000 and a property tax rate below the national average.

“nesto did a lot of research on home values across the country and where the most value is. And one thing that we found is that a lot of the places with the most value in terms of purchase price and how much house you get for that purchase price is in the province of Quebec,” Belair said.

“If someone’s working remotely, and they’re able to continue to do so, absolutely I would look outside the major cities – there’s a lot of value.”

What type of mortgage are your clients taking out in the current market? Have they been looking beyond the major cities to purchase a home? Let us know in the comments section below.