Variable mortgages become even more appealing to homeowners after BoC rate cut

Following the Bank of Canada’s jumbo rate cut, even risk-averse Canadian homeowners are exploring the possibility of switching from fixed to variable-rate mortgages.

Last Wednesday, the central bank lowered its policy rate by 50 basis points to 3.75%, offering relief for homeowners whose mortgage payments have surged in recent years alongside rising living costs.

Mortgage brokers across Canada report increased inquiries about switching to variable rates, with Andy Hill, a Vancouver-based broker and founder of EveryRate.ca, noting that more than a dozen clients have approached him in the past week alone.

Switching from a fixed to a variable rate could save a client with a $400,000 mortgage around $4,500, even after the typical penalties of up to $4,800, Hill estimated.

Interest in variable rates is rising, especially since the central bank began cutting rates earlier this year. According to Bank of Canada data, the share of new mortgage borrowers choosing variable rates jumped to 12.9% in Q1 2024 from just 4.2% in Q3 2023. Many borrowers are now choosing short-term variable options, hoping to lock in a lower fixed rate if interest rates dip further.

Vancouver-based broker Johnny Hoang noted that some of his more conservative clients are taking this approach, while Andrew Galea, a Toronto broker, observed that among his clients, nearly half were first-time or upsizing buyers, with the rest split between renewals and rate shoppers.

Canada’s major banks have reduced their prime rates to 5.95%, the lowest level in two years. However, some prospective buyers remain on the sidelines, holding out for further rate cuts.

A survey by EveryRate.ca revealed that 74% of Canadians considering buying or refinancing are waiting for rates to fall below 3% before they make a move.

“Given current trends, policy rates may not reach below 3% until late 2025, leaving many buyers and refinancers waiting on the sidelines,” Hill told Reuters.

The government’s anticipated mortgage policy reforms in the new year, aimed at making it easier for buyers with insured mortgages, may help stimulate activity.

Penelope Graham, a mortgage expert at Ratehub.ca, expects these changes to prompt increased activity in the market, particularly among first-time buyers and those refinancing.

Source CMP
By Candyd Mendoza