What the future holds for variable rates

A September rate increase could spell further bad news

What the future holds for variable rates

As the spread between variable- and fixed-rate mortgages grew wider throughout last year, Canadians gravitated in increasing numbers towards the former – although that trend may now be grinding to a halt.

The country’s national housing agency, Canada Mortgage and Housing Corporation (CMHC), revealed in its recently published Residential Mortgage Industry Report that a majority of Canadians (53%) shifted their preference to a variable rate in the second half of 2021, compared with 34% in the first six months of the year.

Still, that trend appeared to have “plateaued” in the spring of 2022, CMHC said, amid the rising-rate environment that’s dominated news headlines throughout this year.

Variable rates could be dealt a further blow after the Bank of Canada’s next announcement on its benchmark rate, scheduled for September 7, which could see the so-called “trigger rate” – the level at which lenders can hike a variable-rate holder’s payments even if they’re usually the same each month – come into play.

An expected further increase to the central bank rate would arrive just as green shoots are appearing on the fixed-rate front, with bond yields – typically a leading indicator of where fixed rates are headed – having plummeted in recent weeks.

Those shifting circumstances are leading many existing mortgage clients to question whether they should convert their rate, according to Mortgage Scout agent Christelle Mwamba (pictured top), although she said variable options are still the better option for many customers in the long run.

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“It’s important for those existing homeowners to remember it’s a marathon, not a metre race,” she told Canadian Mortgage Professional. “At any point, there may be times where it is unfavourable to be in a variable rate, but if you stick to variable as a long-term management strategy, it’s going to outperform a fixed rate. When you have stock and they plummet, you don’t sell, but hold them until they go back up.”

Homeowners who find the market too turbulent and decide to lock into a fixed rate will still probably have to contend with a higher rate than their current variable option, Mwamba pointed out. “That security will come with a premium. My advice is to ride it out,” she said.

The narrowing gap between variable and fixed rates is just one feature of the current market that highlights how much has changed over the last few months. The housing boom that took place near the beginning of the COVID-19 pandemic, and continued into February of this year, is all but a distant memory amid a cost-of-living crisis, persistent inflation, rising rates and a rapidly cooling market.

That said, there are still opportunities in the current market, Mwamba said, especially with speculative buyers who may have been purchasing because money was cheap largely having exited the scene due to rate increases.

“Those ones that were doing [it] just because it was the right time to borrow, because of the cost of financing, shouldn’t have been transacting to begin with,” she said.

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“Now serious buyers who are buying because of necessity are still in the market. When the money was cheap, they were priced out because of a seller’s market. Although the money is more expensive today, the recession in value is actually more significant than the cost of financing worries.”

That means that while borrowing may be more expensive in the current climate compared to last year, customers are likely to be getting better value on the buy side now due to that cooler climate, according to Mwamba.

Real estate ownership should be a long-term strategy rather than a short fix, she said, meaning it’s essential brokers continue to provide informed and detailed advice to keep would-be buyers involved and engaged in the purchasing process.

Less competition in the market compared with the height of the market frenzy is only good news for buyers, she emphasized, even if the mortgage payments will almost certainly be steeper than they would have been at the beginning of the year.

Mwamba said that brokers also have a significant part to play in guiding and advising clients who are current homeowners, even despite a levelling-off of purchase activity in the calmer market climate of today.

“As a broker, it’s important to remember that just because people stop transacting in real estate, that doesn’t mean they’re going to stop mortgages,” she said.

“So when the market shifts and people are not transacting because they’re managing their budget, they’re going to be renovating. They’re going to want to refinance. There is always an opportunity.”