Short-Term, Fixed Mortgage Option Making More Sense for Some Homebuyers

Published November 21, 2022 by Real Estate Leads

There was no way the Bank of Canada was going to get around the need to raise interest rates, and those who are affected by them when it comes to real estate interests are also smart enough to know that runaway inflation can’t be tolerated either. The rates had to go up, and they may well have to stay up for a good long while too. In fairness though this is a floating part of why mortgage stress tests were introduced, and while they’re not perfect they continue to work well in determining if a would-be buyer can truly afford the home they’re taking financing to buy.

All of this is paired with a country-wide housing shortage and the ongoing reality that people need to have the right home for themselves in order to progress through their lives. The lack of affordable starter homes in Canada is a huge problem, although as we mentioned in last week’s entry the federal government is making real investments in affordable housing starting right and now and into the near future. That’s to be commended, and what is also good to see is that new homebuyers are finding ways to make a rockier mortgaging landscape doable for them.

That’s what we’re going to look at with this week’s entry here, and like always there is good information to be had for realtors who are looking for smart ways to share valuable insight with clients who are ready to purchase a home. There are definitely trends in Canadian real estate that make finding these folks more of a challenge, and especially for realtors who are newer to the business. Our online real estate lead generation system here at Real Estate Leads here is a good choice for those who a very real aid there, as it works to identify prospective new clients very effectively and gives you first crack at them.

Short-Term and fixed mortgages may be something you want to suggest for clients who need to renew their mortgage, and here’s why

Security Over Flexibility

As mentioned, we are all seeing interest rates continue to climb sharply, and because of this ever-greater numbers of borrowers are opting for short-term, fixed-rate mortgages when they need to renew their mortgages. Many of them are opting for fixed-rate mortgages and overall it seems that the way the provide better financial security outweighs the flexibility of a variable mortgage and the benefits that come with that.

November of last year (2021) was when the Bank of Canada’s overnight lending rate was sitting at 0.25%, and that was a historic low. Of all these borrowers, around 80% were opting for variable rates according to reliable mortgage industry data. Go ahead nearly a year to last month and October of 2022, and it is only around 53% that are choosing to have fixed rates.  Now the remaining 47% are choosing to have a variable mortgage.

Last month also had the BoC introducing their 6th interest rate hike since March, which bumped up the overnight lending rate to 3.75%. Another increase is expected for December due to inflation remaining high and efforts to curb rampant price rises not working as well as hoped. Canadian home prices certainly a part to that trend though, as median home prices for real estate in Canada are definitely down and that’s a part of why many homeowners are delaying selling their home.

That’s something that also takes away from the supply of new clientele for realtors.

Direct Results

This uptick in fixed-rate mortgages, and especially for ones in the 1–3-year range, are a direct result of rising interest rates. We can agree that choosing a 1 or 2-year fixed-rate mortgage with the intention of riding out the current volatility in the mortgage market is likely a good strategy, but only for some homeowners. Others that are maxed out on their home expenses and can’t handle another increase might be better served with longer-term fixed rate mortgage renewal.

Plus let’s remember that short-term fixed rates are slightly higher than 5-year fixed rates at the moment, and consumers can see the relevance of that when making their decisions too.

The procedure to qualify for a fixed-rate mortgage factors in here too. Now that the prime rate has moved up, qualifying for fixed and variable is similar. Home sales across the country have been slowing, and so there is also a resulting slowdown in mortgage activity in general too. Mortgage quotes for primary properties for October were down 59%. Quotes for vacation properties dropped 64%.


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