Canadian home buyers return to fixed rate loans as economy falters

A ‘For Sale’ sign stands in front of a house that has been sold in Toronto, Canada, June 29, 2015. REUTERS/Mark Blinch/File Photo

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TORONTO, Aug 10 (Reuters) – Canadian homebuyers are turning to fixed-rate mortgages at the fastest pace in a year, betting more rate hikes from the central bank are in store for control inflation, even though the cost of these mortgages remains close to the highest level since 2009.

Borrowers are also increasingly shunning the popular five-year fixed mortgage term in favor of two- or three-year loans, to hedge against the possibility that the Bank of Canada’s rapid rate hikes will push the economy into recession. and lead to another round of easing.

More than half of Canadian homebuyers have switched to variable rate mortgages since July 2021 as these have become cheaper than fixed mortgages.

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Now it reverses, returns to the historical norm. Fixed-rate mortgages accounted for 49% of all home loans in May, according to the latest Bank of Canada data, down from 43% in March, the lowest proportion since the Bank began tracking data in 2013 .

James Laird, co-founder of mortgage rate comparison site Ratehub.ca, said the trend continues, estimating that fixed-rate mortgages accounted for more than half of all new home loans in July.

“If (current economic conditions) are keeping you up at night, the best thing to do is get a fixed rate mortgage and forget about it,” Laird said.

Borrowers are increasingly opting for this certainty, even if the fixed rate is still only a tad below a 13-year peak reached in mid-July. That means they could face high payments for longer if rates go down over the next two to three years. Refinancing can be a somewhat expensive option.

The best discounted five-year fixed rate is 4.24%, while the floating rate is 3.5%, the narrowest spread since September, another factor pushing more borrowers towards the former.

Variable loans are linked to the Bank of Canada’s benchmark rate, which has increased by 2.25 percentage points since March. Fixed rates are moving alongside long-term bond yields, which have fallen below short-term yields, a sign that markets fear a recession.

Michael Driscoll, head of North American financial institutions at DBRS Morningstar, said if the economy slips into recession due to aggressive interest rate hikes, fixed-rate borrowers would be locked into higher payments even when variable rates would drop, reducing their spending elsewhere. .

While higher defaults and associated losses are inevitable when rates rise quickly, the financial system is unlikely to be hit given the large equity that backs these mortgages, Driscoll added.

According to their latest financial statements, the outstanding uninsured mortgages of Canada’s largest banks, which make up the majority of their portfolios, represent about 50% of the value of the homes they are backing on. The loan-to-value ratio on new originations is equal to or less than 70%. Uninsured mortgages require a down payment of at least 20%.

Borrowers are also increasingly considering shorter-term fixed-rate home loans, which are generally considered riskier because they expose them to higher rates at expiration, but the current environment makes them more attractive.

Mortgages less than five years old accounted for 53% of fixed-rate home loans in May, down from 51% in January, according to Bank of Canada data.

“In January it was ‘give me your lowest rate and lock it in for as long as you can,'” said Mark Ostland, director of mobile experience at Meridian Credit Union. But now, “we have tons of conversations, and…certainly, a shorter term is in this conversation.”

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Reporting by Nichola Saminather; Editing by Josie Kao

Our standards: The Thomson Reuters Trust Principles.

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