Analysis: As rates fall, adjustable-rate mortgages regain favor

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Industry watchers say the Bank of Canada’s two interest rate cuts, with further cuts expected, have begun to make floating-rate mortgages more attractive to some homebuyers, including in London.

Before and during the coronavirus pandemic, when interest rates were at historic lows, variable mortgages were a popular choice for homebuyers looking to save money on their property.

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That popularity evaporated quickly over the past two years after the Bank of Canada began aggressively raising interest rates to tame runaway inflation, with the vast majority of buyers turning to fixed rates.

The rapid rise in the bank’s key lending rate – from 0.25% in March 2022 to 5% in July last year – caught some homeowners off guard, many of whom saw their monthly mortgage payments surge.

“Before the pandemic, we were seeing a lot of people choosing this route because they never thought this would happen,” said Austin Titus, a London-based broker with North Elm Realty Group.

Titus said most homebuyers right now are being cautious and sticking with fixed-rate mortgages.

But Titus said the number of customers asking about variable-rate mortgages is rising as consumer confidence rises following two consecutive rate cuts by the Bank of Canada and more positive economic data on inflation.

“My advice is to always stick with what you know, not what you don’t know,” he said.

“But with the expected rate cuts, we may see more people opting for variable mortgages as people anticipate rates will fall further.

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“So while people do pay a premium now, in the future they expect to benefit from lower interest rates.”

Victor Tran, mortgage and real estate analyst at RatesDotCa, shared the same view.

Tran has also seen an increase in enquiries from homebuyers in recent months, but the majority of people now opting for variable rate mortgages are those whose mortgage contracts are coming up for renewal because they do not need to take part in the mortgage stress test as long as they continue with the same lender.

“Most people are just looking to save money now, not later,” he said.

“But if that makes sense for you, you’re essentially taking a floating rate and taking the short-term pain but getting the potential long-term gain.”

Ms Chan said while fixed rates offered stability in terms of monthly mortgage servicing costs, concerns about missing out on cheaper rates could also prompt some people to consider variable rates.

He said some buyers had decided to opt for shorter mortgage terms, rather than the usual five years, to give themselves some flexibility in the future.

“Any customer who gets a fixed rate is essentially locked into a fixed rate that’s at the highest point in the last decade,” Tran said. “So some of them are saying ‘I want a three-year term and hopefully I can get a lower rate when I renew.'”

jjuha@postmedia.com

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