Canadian homebuyers cram into variable loans, mitigating impact of rising fixed rates, Real Estate News, AND RealEstate



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TORONTO: A recent move by major Canadian banks to raise fixed mortgage rates amid surging bond yields is unlikely to slow the nation’s searing housing market as more than half of new borrowers take out variable rate loans that are the cheapest they’ve ever been.

The market share of new variable rate mortgages jumped to 51% in July, the highest level since the Bank of Canada started tracking data in 2013, from less than 10% at the start of 2020, and mortgage brokers say this has continued to increase since then.

This change is the result of a growing spread between variable rates which move parallel to the overnight rate and fixed rates, which have followed the rise in bond yields. The spread is expected to widen further, thanks to the Bank of Canada’s commitment not to raise the benchmark rate until the second half of 2022, even as bond yields continue to climb due to rising inflation.

This, in turn, means that the popularity of adjustable rate mortgages will continue to grow, reversing a trend that has been in place for more than a decade, according to experts.

Growing demand for housing during the pandemic has led the country’s mortgage insurer and the Bank of Canada to warn of escalating risks, and politicians have pledged to take action to increase affordability. Yet the central bank’s own low interest rate policies helped fuel the surge in demand.

“We are at a point where there is an artificial removal of the short-term rate controlled by the central bank,” said mortgage broker Ron Butler. But “a market-based rate like the five-year fixed rate says ‘no no no, I think the rates have to go up’.”

But “the effect on the market, where the variable rate is so low, is very blunt,” he added.

Canada’s largest banks have raised their five-year fixed rates in response to surging bond yields, ranging from the Royal Bank of Canada’s rate of 2.44% to that of the Toronto-Dominion Bank of 2.29% .

That pushed the discounted average fixed mortgage rate to a 16-month high of 1.94% on Wednesday, while the discounted variable rate fell to a record 0.95%, according to rate comparison site

“The variable rate is half the fixed rate,” said James Laird, co-founder of, adding that the demand for variable rate mortgages typically increases when they are at least 75 basis points cheaper than the rate. fixed. “It’s the most extreme difference we’ve seen.”

Mortgages have fueled bank profit growth during the pandemic, but as economies open up, banks have more opportunities to lend and their willingness to pass their higher borrowing costs on to buyers. houses shows this flexibility.

The rise in fixed rates illustrates that part of the eagerness of banks during the pandemic to increase mortgages to deploy excess capital has diminished, said Ryan Bushell, portfolio manager at Newhaven Asset Management.

The fact that they are pushing more borrowers into variable rate loans shows that they “want people to adjust the curve faster,” he said, because any hike in the bank’s interest rates central bank would increase floating rates while fixed rates would remain the same.

A decline in aggregate mortgage demand will only happen if bond yields rise 100 basis points or more, although this is offset by better margins for lenders, said Rob Colangelo, vice president and senior manager. credit at Moody’s Investors Service.

“If bond yields continue to rise, they may have to make adjustments here and there, but I don’t think they would be … as big as if the Bank of Canada said it was going to raise rates 50 to 100 points, for example, ”he said.


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