Demand for variable-rate mortgages has plummeted over the past year – thanks to a series of rapid rate hikes from the Bank of Canada – as borrowers return to the fixed-rate space for slightly lower pricing and overall stability.
New data from Ratehub.ca finds that inquiries made within the site for five-year variable rates have accounted for only 5% of all such user submissions so far in 2023, compared to 26% in 2022. Meanwhile, appetite for fixed mortgage rates has been steadily rebounding, with inquiries for five-year fixed mortgages accounting for 79%, up from 66% in 2022.
While fixed-rate mortgage terms have always been the most prominent in Canada – typically with a market share around 80% – demand for variable products surged over the course of the pandemic, after the Bank of Canada slashed its benchmark rate to a record low of 0.25% in March 2020. It remained there until March 2022, offering borrowers at the time some of the lowest floating-rate debt in history over a two-year period.
And borrowers snapped up those deep discounts in droves; according to a report released by the Bank of Canada in November 2022, variable mortgage market share had grown to one-third of all outstanding mortgage debt, up from 20% at the end of 2019.
According to James Laird, Co-CEO of Ratehub.ca and President of CanWise mortgage lender, while fixed rates were also priced at record lows at the time, the spread between the rate types was too attractive for many borrowers to pass up.
“During the pandemic, mortgage rates reached historic lows, dropping as low as 0.85% for a 5-year variable rate and 1.39% for a 5-year fixed rate,” he says. “Variable rates became more popular than usual, accounting for over 20% of Ratehub.ca mortgage rate inquiries.”
But that trend reversed abruptly starting in the first quarter of 2022, as soaring inflation prompted the Bank of Canada to increase its rate in efforts to claw the Consumer Price Index back down to its target range of 2%. A combination of post-lockdown economic recovery, geopolitical tensions, and supply-chain logistical snarls had driven the measure to a 40-year high of 8.1% in June 2022.
The resulting eight rate hikes from the central bank have increased its Overnight Lending Rate to a 15-year high of 4.5%, which is anticipated to stick for the foreseeable future. That’s driven today’s best five-year variable rate to 5.55%. The fixed rate space, meanwhile, has seen rates tick lower in recent weeks, thanks to volatility in the bond market. The best five-year fixed mortgage offering is currently 4.29%; that spread of 126 basis points, combined with the stability of a fixed rate in an otherwise volatile rate environment, has made it desirable to lock in once again.
“With the Bank of Canada rate hikes and overall rise in mortgage rates, consumers have switched back to fixed rates, with 95% of rate inquiries to Ratehub.ca in 2023 being for fixed rates,” says Laird.
Borrowers increasingly considering shorter-term options
Another prominent trend captured by the data is increasing demand for shorter-term fixed rates, as borrowers look to lock in, but leave their options open for a potentially lower rate environment in the short term.
“Consumers are currently more interested than usual in short-term fixed rates because many experts are predicting that rates will drop in the coming years,” Laird adds. “Getting a short-term fixed rate allows borrowers to take advantage of future lower rates sooner.”
Demand for variable won’t return until rate cuts
The Bank of Canada – along with the US Federal Reserve – has strongly indicated it is finished with its rate hiking cycle, as long as economic data, such as inflation growth and GDP, fall in line with its forecasts. That’s led markets to anticipate rate stability throughout the remainder of the year.
However, until the Bank actually actively cuts its benchmark rate, there isn’t much relief on the horizon, and given inflation’s glacial descent, elevated borrowing costs will linger in the months to come.
As stated by Bank Governor Tiff Macklem after the April 12th rate announcement, while the latest March print of 4.3% is a “welcome relief”, the Bank anticipates CPI will remain above its target until at least 2024, when potential recessionary factors could prompt the central bank to cut rates for the first time in two years.
And, according to Laird, variable-rate popularity won’t be bouncing back in the interim.
“We expect demand for variable rates to stay depressed and interest in short-term fixed rates to remain elevated until the Bank of Canada cuts the target for the overnight rate from its current level,” he says.