Variable mortgage rates – will their popularity continue?

With the Bank of Canada having already introduced its first benchmark rate increase of the year, and a further hike anticipated in its next statement on April 13, it might be expected that the popularity of variable rates will inevitably wane.

Those rates rise and fall in tandem with the Bank of Canada’s trendsetting rate, unlike fixed rates which are influenced by how bond yields are faring.

As the Bank of Canada rate plummeted at the onset of the COVID-19 pandemic, the spread between fixed and variable rates became vast, one of the factors that accounted for the rise in popularity of variable options.

With multiple Bank hikes on the horizon this year and next, that spread is expected to eventually narrow considerably. Still, an interesting recent trend has seen the gap actually widen again because of the fact that while banks continue increasing their fixed rates, the variable usually only changes after the central bank’s scheduled policy announcements.

“It’s sort of counterintuitive, but fixed rates have already moved quite significantly based on future expectations of Bank of Canada policy whereas the variable has to wait until that policy is actually announced,” explained James Laird (pictured top), RateHub.ca co-founder and CanWise Financial president.

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“So we’re in a position where fixed rates are up another 1% in the last little bit, and variables have only moved the quarter-point that the Bank has increased so far. When you think about a variable, you think about a rate that changes a lot – but it’s actually the fixed rate that prices in that future outlook faster, since the variable has to wait for the actual policies.”

Of course, that’s not expected to be the case for long, with recent speculation suggesting that the Bank could be preparing for a 0.5% rate hike in that April rate announcement, having upped the benchmark rate by a quarter-point in March.

In fact, the Bank of Montreal (BMO) has recently indicated its expectation that the central bank is set to unveil two consecutive half-percentage point hikes, while Bank of America Corp. and Citigroup Inc. anticipate three successive 0.5% increases.

Laird echoed the expectation that the Bank’s April 13 statement – which is set to arrive less than a week after the federal government reveals its 2022 budget – will see a 50-basis-point hike.

That budget is expected to see some action on the housing front, although the government has yet to hint at what could be in store. Nevertheless, Laird said that with the Liberal Party having included a sizeable list of housing priorities in its 2021 election manifesto, it was difficult to ascertain whether its housing aspirations for the near future were small or grander in scale.

“The Liberal platform on housing was enormous. You name it, they had a policy around it,” he said. “So it’s tough to predict what they’re going to sift through and pick out of there.

“So far, the Liberal government hasn’t done anything. They’ve made these little changes like the First Time Home Buyers’ Incentive that might sound good but aren’t really structurally significant policy changes.”

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Examples from the Liberal platform that would represent significant changes if enacted, according to Laird, are raising the Canada Mortgage and Housing Corporation (CMHC) insurability limit from $1 million to $1.25 million and introducing a national foreign buyers’ tax, another policy that has been considered in recent times.

The idea of a 30-year amortization for insured mortgages, while not included in the Liberal platform, would be a welcome one for buyers, Laird said – although he also emphasized that it shouldn’t come without an honest discussion of whether the government should make homebuying easier or more difficult.

“We’ve got to stop running away from that discussion. But if we want to make it easier, I think this is one of the best policies,” he said. “This is what they should have done instead of the First Time Home Buyers’ Incentive. It’s the change of a single line of policy [and] doesn’t require a department to roll it out.

“We don’t lose tax dollars in the bureaucracy of rolling out the program – it’s clean, simple, all these things. It’s sound policy, assuming the goal is to make it a little bit easier for people to purchase homes.”