Date: June 20, 2023
Category: Blogs,Mortgage Tips & Advice
Introduction: In recent times, the popularity of variable-rate mortgages has experienced a noticeable decline, bringing it close to pre-pandemic levels seen in early 2020. As prospective homeowners navigate the ever-changing landscape of mortgage options, it’s essential to stay informed about these shifts in the market. In this blog post, we’ll delve into the data, explore the reasons behind this trend, and discuss the implications for borrowers and lenders alike.
The Current Landscape:
Data from Statistics Canada reveals a significant shift in the mortgage market. As of April, variable-rate mortgages accounted for just 8% of new mortgage originations, while fixed-rate mortgages took up the remaining 92%. This drop is particularly striking when compared to the peak of nearly 57% reached in January 2022, when certain variable-rate mortgages could be secured at an unprecedented low rate of 0.99%.
Factors Driving the Change:
The Bank of Canada’s implementation of a series of rate hikes, totaling 450 basis points, has played a crucial role in shaping borrower preferences. As a result, variable rates now hover between 5.50% and 6%, prompting an increasing number of new borrowers to opt for fixed-rate mortgages with shorter terms. At the start of the year, 1- and 2-year terms constituted 42% of new originations, but now 3- and 4-year terms have taken the lead.
Implications for Mortgage Borrowers:
The term lengths of new mortgages have undergone a notable shift. In April, 39% of new mortgages had a term of less than 3 years, while nearly 41% opted for 3- or 4-year terms. Surprisingly, the traditionally preferred term of five-year fixed mortgages now accounts for only 12% of originations. These changes reflect borrowers’ desire for more flexibility and the potential to reassess their mortgage options in the near future.
Caution from Regulators:
The Office of the Superintendent of Financial Institutions (OSFI), Canada’s banking regulator, has expressed concerns about the risks associated with extending mortgage amortizations. In an exclusive interview with Reuters, the OSFI highlighted the increase in amortization periods for variable-rate mortgage holders with fixed payments. For instance, approximately one-third of BMO’s variable-rate mortgage portfolio now has an amortization period exceeding 30 years, while TD and CIBC have over a quarter of their portfolios with an amortization period exceeding 35 years. Such extensions can lead to higher payments when the mortgage contracts revert to their original amortization schedules at the next term renewal.
Take Action:
Prioritize Responsible Account Management In light of these developments, it is crucial for both borrowers and lenders to adopt a prudent and proactive approach to mortgage account management. For borrowers, understanding the implications of variable-rate mortgages with extended amortizations is essential. Consider seeking professional advice to evaluate the long-term affordability and financial impact of such mortgage structures.
Lenders, on the other hand, must recognize the risks associated with these loans when setting aside provisions for potential losses. The OSFI’s call to address negative amortization promptly is a reminder that responsible lending practices are critical to maintaining a stable and sustainable mortgage market.
In Closing:
The changing dynamics of the mortgage market, with the decreased popularity of variable-rate mortgages and the rising preference for shorter fixed-rate terms, highlight the evolving landscape that borrowers and lenders must navigate. It’s never been as important as it is today to stay well-informed and work with a mortgage professional that will help you navigate this new landscape, including the benefits and risks involved.
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