Bank of Canada’s consecutive rate cuts stimulate homeowners interest in variable-rate mortgage: mortgage brokers

Following the Bank of Canada’s two consecutive interest rate cuts with potentially more to come by the end of the year, variable-rate mortgages are starting to pique homeowners interest again, mortgage brokers say.

 

Variable-rate mortgages are tied to rate changes by the Bank of Canada, which on July 24 dropped down by a 0.25 percentage point to 4.5 per cent. Meanwhile, most fixed-rate mortgages are tied to the five-year bond yield, meaning when the bond yield goes up so does the interest on fixed-rate mortgages — and when inflation rises, bond yields tend to follow suit. Bond yields have dipped recently, resulting in lower fixed-rate mortgages.

 

Nonbank lenders are seeing around 20 per cent of their new mortgage business choose variable-rate mortgages, said mortgage broker Ron Butler, an increase from around as low as five per cent.

 

“Some lenders are seeing an uptick in variable-rate mortgages,” he said, but it’s still the minority of homeowners. “It’s a public sentiment-driven product and the public won’t really tune in or think about it seriously as they’ve had a hell of a scare the last little while.”

After the fourth interest rate cut, that’s when public sentiment around the product will see a significant shift, he added.

 

During the pandemic, variable-rate mortgages became popular due to historically low interest rates in the one per cent range. But those homeowners were then blindsided as the Bank of Canada’s rate hike campaign ramped up to cool inflation.

 

“Most of the people returning to variable rates at this time have had it before and did well with it 15 to 20 years prior to the pandemic,” Butler said. While TD and RBC are posting more aggressive variable rates, it’s really nonbank lenders that are seeing greater movement toward variable-rate mortgages at this time, he added.

 

Leah Zlatkin, licensed mortgage broker and LowestRates.ca expert, said the recent volatility in global markets combined with a weak U.S. labour report in July have intensified speculation that the Bank of Canada could cut rates up to three more times this year, leading homeowners or prospective buyers to consider variable-rate mortgages.

 

“We could be at the beginning of a resurgence of interest in variable rates,” said Zlatkin. “Many that were hesitant to lock into a variable until they were more confident in further rate cuts may feel more at ease choosing a variable rate now. Even so, it’s a good idea to run the numbers with a broker to make sure that a variable makes sense in various scenarios, including if overnight rate cuts are further delayed.”

 

According to the latest rates posted to LowestRates.ca, the best rate for a five-year fixed rate is 4.69 per cent, and the best rate for a 5-year variable is 5.49 per cent, she said.

 

The difference between them means the overnight rate would need to drop by 75 basis points for the variable rate to match the fixed rate. If a homeowner were to take the variable rate now, they’re betting on three successive 0.25-percentage-point overnight rate cuts from the Bank of Canada to take advantage of the product, Zlatkin added.

 

“The issue with taking a variable rate now is that nothing is guaranteed,” said Zlatkin.

 

“If you are fortunate enough to be in a position in which higher rates for a longer period won’t significantly damage your finances, then a variable rate may make sense. For those with tighter finances, taking the lower, fixed rate for a shorter term would provide more stability in the near future.”

 

 

 

This article was first reported by The Star