What's next for fixed-vs-variable mortgages?
After surging in line with Bank of Canada rate hikes over the past two and a half years, variable mortgage rates are finally on the way down this summer.
The central bank’s decision to clip its benchmark rate in back-to-back announcements – June and July – has seen variable rates begin to slide, with expectations growing of more cuts before the end of the year amid a darkening economic outlook both in Canada and south of the border.
Still, current discounts of around 1% off bank prime rates will likely prove insufficient to sway many borrowers towards variable options, according to a leading Toronto-based mortgage broker.
Speaking with Canadian Mortgage Professional in the wake of the Bank’s latest interest rate cut, Leah Zlatkin, chief operations officer and broker at Mortgage Outlet, pointed out that there remains a notable gap between the cost of a five-year fixed and a five-year variable mortgage. “It’s still maybe not a time when people are shifting the pendulum from fixed to variable, because there is still that debt variance,” she said.
“And unless you believe that the Bank of Canada is going to go through another three decreases in rapid succession and you’re going to have time and energy to benefit off that [possible] 0.75% decrease well after it’s happened, because you need to make up for interest paid up front, I think for a lot of people variable may still not be the safest bet.”
Fixed rates dip amid worrying US economic trends
Another rate cut in September is widely expected, but fixed rates have also dipped recently as storm clouds gather over the US economy and the sudden prospect of a recession there looms into view.
Five-year Government of Canada bond yields plunged in response to the turmoil roiling US markets, dropping to a level not seen since the chaos that engulfed the US economy after a spate of regional bank failures in spring last year.
The Bank of Canada’s two announcements this summer mark the first time it has cut rates since March 2020, when it slashed its overnight rate to a rock-bottom 0.25% at the onset of the COVID-19 pandemic.
It held that rate steady for nearly two years before beginning a rapid flurry of rate hikes throughout 2022 and 2023 in a bid to bring ballooning inflation under control.
While its cuts to date in 2024 – totalling 50 basis points – are unlikely to light a fire under Canada’s housing market, Zlatkin said those moves will undoubtedly spur consumer sentiment that things re moving in the right direction. “Any news like the Bank of Canada decreasing the rate stimulates a lot of interest in real estate from the Canadian consumers,” she said.
“A lot of people don’t understand that the variable rates are not the same as the fixed rates and they don’t really understand the nuances there. So I’ve received a lot of inquiries from people since the rate decrease happened, trying to figure out whether they qualify for more, trying to figure out whether they can get into X, Y, Z house. So it seems like there’s some interested generated just based on the publicity.”
On the refinancing side, Zlatkin said a majority of clients appear to be going with three-year fixed products, although she noted the fact that some B lenders are offering “pretty aggressive” variable rates at present could tip some borrowers towards a three-year variable with those lenders instead of a one-year fixed.
How has a slowing US economy impacted the BoC’s approach?
One of the biggest factors impacting the Bank of Canada’s outlook for the rest of the year will be the Federal Reserve’s approach to a US economy that’s suddenly, and rapidly, cooling.
US employment figures released last week showed that the jobless rate jumped to 4.3% in July, with the number of Americans in employment rising by a barely noticeable 0.04% compared with the same time last year.
The Fed had previously been expected by markets to make just one cut before the end of the year – but the prospect of more than one rate drop in the US has also opened the door for more dramatic action by the Bank of Canada, according to the Bank of Montreal (BMO).
Doug Porter, BMO’s chief economist, said in the wake of the latest US jobs figures that the bank now expected Canada’s central bank to cut rates four times in the next four meetings, meaning rates should fall by a full percentage point between now and January, followed by a further half-point drop by the middle of next year.
Source CMP
By Fergal McAlinden
