Why short-term fixed options are increasingly popular for Canadian borrowers

The recent market has seen an uptick in those mortgage types

Why short-term fixed options are increasingly popular for Canadian borrowers

It’s still anyone’s guess as to whether the Bank of Canada will hike or cut its policy rate in the coming months – and Canadian borrowers appear increasingly open to taking out shorter-term, fixed-rate mortgages in that uncertain climate.

New data from Ratehub.ca showed that searches on its site for fixed-rate options of between one and four years have leapt from 6% in 2022 to 14% so far this year, although unsurprisingly five-year fixed rate options account for the bulk of inquiries to date in 2023 (79%, up from 66% last year).

When the central bank slashed its benchmark interest rate at the onset of the COVID-19 pandemic, variable rates plummeted and borrowers surged towards those options as a result.

However, that benchmark rate has spiked by 4.25% since March 2022 – and interest in variable rates has plunged, with only 5% of all rate inquiries to Ratehub concerning five-year variables.

Canada’s mortgage agent and broker community has also reported a recent uptick in interest for shorter-term fixed mortgage rates among clients.

Christelle Mwamba (pictured top), a Toronto-based agent with Mortgage Scout, told Canadian Mortgage Professional that fixed-term options of around three years allowed borrowers to avoid the shock of potential further Bank of Canada hikes in 2023 and avail of lower rates sooner if the central bank decides to cut, as expected, when inflation returns to its target rate.

“A lot of variable borrowers were panicking last year when prime kept increasing and increasing, and are now kind of just gauging what’s the best course of action,” she said. “Some of them have actually decided to lock in shorter-term.

“Now I’m seeing a lot more [choosing] shorter-term than going five-year fixed. Even if you’re paying prime minus one and you’re at 5.7%, you might as well lock in at 4.6% on a three-year and wait until rates kind of start shifting and we get an indication from the Bank of Canada as to the direction of where they’re going to take rates.”

Why is the short-term outlook uncertain for variable rates?

The possibility of a central bank rate cut in Canada reared its head in March amidst banking turmoil in the US and fears that its tremors could spread north of the border.

However, that now appears a distant prospect, especially with Canada’s labour market proving more resilient than anticipated and inflation unexpectedly ticking upwards again last month, its first increase since June 2022.

“I doubt the Bank of Canada is going to drop prime [in 2022],” Mwamba said, speaking shortly after the April inflation figures were revealed. “I think we’re going to anticipate another hike – especially after today.”

The shorter-term stability afforded by fixed-rate options is also welcomed by clients, particularly new buyers, in the turbulent and unpredictable mortgage market that’s developed over the past year, according to Mwamba.

“My thing is to make sure that my clients don’t come back to me after six months and say, ‘Oh my God, I’m stuck, I can’t afford my monthly mortgage payments.’ So that’s really key,” she said.

“I’m encouraging shorter terms until we’re able to see the prime going back down… Just go ahead and go fixed, three years. That will help with your affordability too and consolidate your loan, consolidate everything – credit cards, all that stuff, [and] especially with inflation as it is right now, that will also help you with your cash flow.”

Does the US banking crisis still present a risk?

The outlook for fixed rates also brightened considerably following that US banking chaos in March. Canada’s five-year government bond yield, a key indicator of where fixed rates are headed, saw a huge drop as the collapses of Silicon Valley Bank and Signature Bank caused carnage on Wall Street.

Those yields have since stabilized, although Bank of Canada senior deputy governor Carolyn Rogers noted the lingering risk in remarks accompanying the release of its annual Financial System Review.

“The recent turbulence in global markets stemming from bank failures had little direct impact on Canadian banks,” Rogers said. “But if global stresses were to return and persist, bank funding costs could rise beyond the higher levels induced by tighter monetary policy.

“In addition, in a severe stress situation, funding could also become harder to secure. In response, banks would likely constrain credit to households and businesses, potentially exacerbating an economic downturn.”

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