Canadian home buyers pile into variable loans, blunting impact of rising fixed rates
TORONTO — A recent move by major Canadian banks to increase fixed mortgage rates on the back of surging bond yields is unlikely to slow the country’s red hot 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 surged to 51 per cent in July, the highest level since the Bank of Canada began tracking the data in 2013, from less than 10 per cent in early 2020, and mortgage brokers say this has continued to increase since then.
The shift is the result of a growing gap between variable rates that move alongside the overnight rate, and fixed rates, which have followed bond yields higher. The spread is set to further expand, thanks to the Bank of Canada’s pledge that it won’t raise the benchmark rate until the second half of 2022, even as bond yields continue to surge on rising inflation.
This, in turn, means the popularity of variable-rate mortgages will grow further, overturning a trend that has been in place for over a decade, according to experts.
Surging 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 vowed to take steps to boost affordability. Yet, the central bank’s own low-rate policies have helped fuel soaring demand.
“We are at a point where there’s an artificial suppression of the short-term, central bank controlled rate,” said mortgage broker Ron Butler. But “a marketplace-based rate like the five-year fixed says ‘no no no, I think rates have to go up’.”
But “the effect on the marketplace, where the variable rate is so low, is very much blunted,” he added.
Canada’s biggest banks have raised their five-year fixed rates in response to the surge in bond yields – ranging from Royal Bank of Canada’s rate of 2.44 per cent to Toronto-Dominion Bank’s 2.29 per cent.