Canadian Homebuyers Embrace Variable-Rate Mortgages Amid Rate Cut Expectations

Canadian Homebuyers Favor Variable Mortgages Amid Rate Cut

Canadian homebuyers are increasingly turning to variable-rate mortgages, reflecting mounting anticipation of forthcoming interest rate cuts by policymakers. Recent data from the Bank of Canada shows that the share of borrowers opting for mortgages tied to the central bank’s benchmark rate rose to 12.9%. This increase occurred in the first quarter of the year. This marks a second consecutive quarterly increase. The rate was at a low of 4.2% in the third quarter of 2023. However, it remains below pre-pandemic levels, a period when floating-rate loans briefly dominated the market.

Anticipating Monetary Policy Adjustments

The shift in borrower preferences toward variable rates began even before the recent policy interest rate cut by the Bank of Canada. Economists now project that the current benchmark rate of 4.75% will lead to economic deceleration and moderating inflation. This is expected to prompt further reductions, potentially lowering the rate to 3% by the end of 2025. This forecast, derived from a Bloomberg survey, would result in a commercial bank prime lending rate of around 5.2%. Typically, variable mortgage rates for borrowers with good credit hover slightly below the prime rate.

Robert Hogue, an economist at Royal Bank of Canada in Toronto, highlighted the rationale behind the trend. He stated, ‘There’s widespread consensus that the Bank of Canada will lower rates, though opinions vary on the extent and pace of these cuts’. Hogue explained that homebuyers are attracted to variable-rate mortgages. Despite higher initial costs, they foresee long-term savings over the duration of their mortgage terms.

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Impact on the Housing Market

The Canadian housing market has recently experienced a slowdown, with prices dipping as a result of the highest interest rates in decades deterring potential buyers, including Canadian homebuyers. However, the increasing preference for variable-rate mortgages may signal a shift in market sentiment. This suggests that the impact of previous rate hikes is beginning to subside.

Broker Insights and Consumer Interest

Following the Bank of Canada’s recent rate adjustment on June 5th, Shawn Stillman, principal broker at Mortgage Outlet in Toronto, noted a surge in inquiries about variable-rate mortgages. Despite their current rates being slightly higher than fixed-rate options, there has been significant interest. “It’s a conversation I have with pretty much everybody,” Stillman remarked. Once I explain and show a chart indicating we expect rates to fall by 1% over the next 12 months. A lot of people become very interested.

Looking Ahead

As expectations for lower interest rates persist, Canadian homebuyers are navigating their mortgage options with a strategic eye on potential savings. The evolving landscape suggests growing confidence in variable-rate mortgages. They are seen as a viable financial tool amidst changing economic conditions and monetary policy adjustments. Analysts and industry experts continue to closely monitor these developments. They anticipate broader implications for the housing market and consumer behavior in the coming months.

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