Those options remain the overwhelming choice of nesto borrowers, says company co-founder
Much has been made of the popularity of shorter-term mortgage rates in recent times – but borrowers at nesto are overwhelmingly gravitating to five-year options at present, according to the company’s latest data.
The digital brokerage has revealed that its five-year mortgage remains by far its most popular, accounting for 82.78% of client appointments compared with a mere 5.0% share for short-term fixed rates.
That finding arrives despite plenty of publicity around shorter-term options reportedly seeing an upswing because they allow clients to lock into a two- or three-year option in the expectation or hope that rates will be lower upon renewal than they currently are.
For Chase Belair (pictured top), nesto’s co-founder and principal broker, the enduring popularity of longer-term fixed rates reflects a shifting trend in the mortgage space.
“When the Bank of Canada started increasing rates, [beginning] last March and throughout the year, five-year variable’s popularity obviously began to diminish quite quickly, and the popularity of two-, three-, and sometimes even one-year terms increased quite a bit towards the end of the year,” he said.
“At the time, also what was noteworthy was the spread between the two-, three-, and four-year rates was not too far away from the five-year rates,” he said. “So you really weren’t losing too much in terms of your mortgage payment by choosing a shorter term.”
Because of that slight spread, borrowers were rarely leaving a sizeable amount on the table in choosing shorter-term options – but it’s risen since the end of April and beginning of May, meaning that short-term mortgages now have a significantly higher mortgage payment in many cases than their longer-term counterparts.
“What we saw in April, May, and now getting into June, is the five-year being [much] more popular because the payment is that much lower,” Belair said. “People want that lower monthly payment and they’re forfeiting the ability to make a bet on what rates would be in three years or two years.”
“I’ve never experienced clients reaching out for advice as much as I have over the last year. They’re scared and they want to talk about it,” David Clarke of the Clarke Mortgage Group said.https://t.co/R6Kblj087m#mortgagebroker #mortgageadvice
— Canadian Mortgage Professional Magazine (@CMPmagazine) June 30, 2023
When might a shorter-term mortgage be the better option?
If the spread between shorter- and longer-term options had risen, but remained reasonable, there might be grounds for continuing to choose those short-term mortgages – but the current gap means it makes little sense in most cases not to go with a five-year option, according to Belair.
“For me, personally, if the three-year rate was lower than the five-year, I’d give strong consideration to choosing it,” he said. “If it was a tiny bit higher, I would also probably take it seriously and consider it.
“But when the difference is more than 0.5%, and we’ve seen it be more than 0.5% for some time, it’s really hard to justify it personally as a borrower, paying that much more per month just for the opportunity to bet that the rates are going to be lower, or low enough, three years from now that I’m going to recoup that savings back.”
Securing a shorter-term rate in anticipation of potentially lower rates down the line may seem like an appealing proposition – but a lower-rate environment in 2025 or 2026 is by no means a surefire thing.
Uncertainty remains about the direction of interest rates
Belair said there was no guarantee that rates, which have spiked on both the variable and fixed side in recent times, would return to lower levels by then.
“The consensus that we see in the market is that we’re at the top of a rate cycle, but there doesn’t seem to be a consensus around what the new normal is going to be,” he said. “For all we know, this is the new normal where we’ve been told many times and we read many times that we’ll never see those low rates again that we experienced from 2018 up to 2022.
“So if today’s rates are the new normal, then a five-year term is a great option for anyone who doesn’t need to break their mortgage for the next five years.”
The decision may be more pronounced for borrowers who are dealing with one of the traditional institutional lenders, he added.
“nesto has extremely fair mortgage penalties, especially fixed terms in comparison to a lot of the big banks,” he said. “So if I’m a borrower sitting in front of a big bank, I know that [when it comes to] the three-year versus five-year option, there’s a lot more weight on the penalty decision. That’s a factor as well.”
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