The mess that the string of interest rate hikes over recent years has left some homeowners is unfortunate, but it does highlight the risks involved when people over leverage themselves when buying a home. And more specifically when they do so with a variable rate mortgage. That said, it is not a situation where a fixed rate mortgage is the right choice all of the time.
It is something that people need to really dig into, and a part of what a good mortgage broker will be able to do when guiding clients through the process. For some buyers a variable rate mortgage IS going to be right for them based on their individual circumstance and all the different factors that will go into that.
Realtors working with 1st time homebuyers can be proactive in helping them along here too, and for any real estate agent for whom finding those clients is a struggle our online real estate lead generation system here at Real Estate Leads is an excellent resource that is available. There are very valid reasons why homebuyers are opting for short-term fixed rate mortgages. The workings of that is what we will look at with our entry this week here.
Waiting on Benchmark Rate Cut
The basics of it is that Canadian homebuyers are increasingly searching for shorter-term, fixed mortgage rates. And the reason they’re doing that is the expectation of a possible better deal in the future if the Bank of Canada makes cuts to its benchmark rate. The number of people searching for one- to four-year fixed rates has increased significantly over the course of this year. But what is interesting is 5-year fixed rate inquiries are up more than all of them.
There is a pair of primary reasons homebuyers are looking at the benefits of short-term, fixed rates. First, this type of mortgage safeguards them against near-term potential further rate hikes. At the same time it also potentially allows them to take advantage of lower rates sooner.
All of this is because experts are predicting that rates will drop in the coming years. It seems as if the bulk of economists feel that interest rates have likely peaked, but that one more quarter-point hike is a possibility this year because of a national economy that is performing much better than expected.
Variable Mortgages to the Wayside
Oppositely, inquiries for 5-year variable rates made to mortgage brokers are much less common these days. Variable mortgage rates did surge in popularity among homebuyers based on interest rates being at historical lows in the way they have been over recent years. This trend deepened during the pandemic when the Bank of Canada slashed its benchmark rate to a quarter of a percentage point.
There was a report in November of last year indicating the central bank said a 3rd of total outstanding mortgage debt in Canada was attached to variable rates. This is about a 20% increase from the end of 2019. But the rapid increase in the benchmark rate over the past 12 months to 4.50% has some homeowners seeing their amortization periods extended significantly or hitting what is known as the ‘trigger rate’ – the point where the monthly payment no longer covers the entire interest portion.
This then comes with a report that by November of last year that half of variable rate mortgage holders had hit their trigger rate. The expectation is that demand for variable rates will stay depressed and interest in short-term fixed rates should remain elevated until the Bank of Canada cuts the target for the overnight rate from its current level.
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