Analysis: As interest rates ease, variable rate mortgages regain appeal

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Two interest rate cuts by the Bank of Canada, and the expectation more are looming, have started to make variable rate mortgages more enticing for some homebuyers, including in London, industry watchers say.

Before and during the COVID-19 pandemic, when interest rates were at historically low levels, variable mortgages were a popular option for homebuyers seeking to save money on their property purchases.

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That popularity quickly evaporated during the past two years, and the vast majority of buyers moved onto fixed rates, after Canada’s central bank began an aggressive cycle of interest rate hikes to tamp down runaway inflation.

The rapid increase in the bank’s key lending rate – which went from 0.25 per cent in March 2022 to five per cent in July of last year – blindsided some homeowners, many of whom saw their monthly mortgage payments balloon.

“Before the pandemic, we saw a lot of people going that route because they never expected that this would happen,” said Austin Titus, a London-based broker with North Elm Realty Group.

Titus said the majority of homebuyers now are wary and are sticking to fixed interest rate mortgages.

But after two consecutive cuts by the Bank of Canada, and more positive economic data on the inflation front, consumer confidence is on the rise, and the number of clients asking about variable rate mortgages is following along, Titus said.

“My recommendation is to always go with what you know versus what you don’t,” he said.

“But with the expected rate cuts, we’re probably going to see a lot more people go toward a variable mortgage because there is an expectation that it is going to go further down.

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“So, while people do pay a premium right now, in the future, there is an expectation they’re going to be benefiting from a lower interest rate.”

It was an opinion echoed by Victor Tran, a mortgage and real estate analyst with RatesDotCa.

Tran has also seen an increase in inquiries from homebuyers in recent months but most of the people opting for variable mortgages now are people whose mortgage contracts are up for renewal because they don’t have to qualify for a mortgage stress test as long as they stay with the same lender.

“Most people are just looking for immediate savings upfront rather than later,” he said.

“But, if it makes sense for you, you are basically going for a variable rate for some short-term pain but potential long-term gain.”

While a fixed rate offers stability in terms of monthly mortgage servicing costs, fear of missing out on cheaper interest rates may also push some people to consider a variable rate, Tran said.

Already, some buyers are deciding on shorter mortgage terms, instead of the usual five-year one, to give themselves some flexibility in the future, he said.

“Any customer assigned for a fixed rate is pretty much locked in at a fixed rate at the highest point in the past decade,” Tran said. “So, some of them are saying ‘I want to go for the three-year term and hopefully I can capture a lower rate when it’s time for renewal.’”

jjuha@postmedia.com

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