The rising-rate question is set to remain as relevant as ever in the year's closing months
It’s already been one of the most dramatic years in recent memory where Canada’s mortgage market is concerned, with a variety of factors – from rising interest rates to a cooler housing market and a cost-of-living crisis – coming together to make 2022 a much different year to those that preceded it.
With the mortgage industry already looking ahead to the fall market, the fixed-vs-variable-rate debate remains, as ever, one of the most prominent issues facing brokers and their clients.
Another Bank of Canada interest rate increase is looming in early September, a move that could have significant repercussions for the fixed-variable battle – especially among first-time homebuyers.
Rising variable rates because of those central bank hikes have made certain fixed-rate options an attractive proposition for many buyers in the current market, according to Peter Puzzo (pictured top), a broker with Dominion Lending Centres (DLC).
He told Canadian Mortgage Professional that new buyers in particular were gravitating towards five-year fixed options in light of rising rates on the variable side.
“When you compare first-time buyers, assuming they’re going with less than 20% down, there are still some monoline lenders that are offering a five-year fixed rate in the mid-fours,” Puzzo, a member of this year’s top 75 brokers in Canada as revealed by CMP, said.
“With the Bank of Canada being where it is today and another increase coming in September, it’s making the insurable five-year fixed rate pretty attractive. So that’s typically where most of my first-time buyers are going.”
While a stress test based on that rate is about 6.5%, a figure that has a not inconsiderable impact on purchasing power, lower property values counterbalance that to some extent, Puzzo said, with first-time buyers now in a position where they could purchase a home that they wouldn’t have been able to at the height of the market frenzy in February.
Recent variable-rate increases have had the effect of shining a light on the different types of variable products that are available in the industry, according to Puzzo, something that brokers will be increasingly attuned to in the future.
He said variable options where the payment amount doesn’t change are likely to become increasingly popular – unless rates increase to a point that brings the so-called “trigger rate,” the level at which lenders can raise the fixed payment amount on a variable mortgage, into play.
“As long as we don’t start hitting trigger rates, which may happen in September, the variable becomes a little bit more appealing – specifically with lenders whereby the payment doesn’t fluctuate unless a trigger rate is hit,” he said.
“You can provide payment certainty to a certain point. For clients that are going variable today, the prime is 4.7%. Let’s say the variable rate is 4.2%. A trigger rate on something like that is probably north of 7% - so the likelihood of rates going there [is small]. If the rates go there, we have other problems.”
The prospect of lower fixed rates has also reared its head in recent weeks, with five-year government bond yields slipping since June in a development that’s already seen one of Canada’s biggest banking players drop its five- and seven-year fixed rates.
That raises the intriguing possibility that variable and fixed rates, separated by a considerable gap for much of the past two years, could return to a similar level in the event of a further supersized Bank of Canada hike in September.
“I’m interested to see if we have some downward pressure on fixed rates going forward,” Puzzo said. “With the Bank of Canada increase, it’ll become even more interesting if you’ve got variable and fixed rates either at par, or maybe in some cases potentially having variable discounted rates slightly higher than discounted fixed rates.”
A series of rate increases by the central bank in 2022 has seen its benchmark rate climb by 2.25%, with some observers predicting that it could be nearing the end of its trajectory on rate hikes.
The Bank’s intentions towards its own rate will be one of the storylines to watch for the remainder of the year, according to Puzzo. “The other thing I’m looking at is whether the [Bank] is finally going to pause after the September increase,” he said, “and give some time to see what sort of impact their increases have had – but it does take time for the data to filter through.”