TORONTO Reuters -- Canadian home buyers are moving to fixed-rate mortgages at the fastest pace in a year, on bets that more rate hikes from the central bank are in place to bring inflation under control, even though the cost of these home loans remains close to the highest since 2009, which is why they are moving to fixed-rate mortgages at the fastest rate in a year.
Borrowers are increasingly eschewing the popular five-year fixed mortgage term in favor of two or three-year loans in order to protect themselves against the possibility that the Bank of Canada'sBank of Canada's rapid rate hikes could cause a recession and lead to another easing cycle.
Since July 2021, more than half of Canadian home buyers opted for variable-rate mortgages, as they became cheaper relative to fixed.
The historic norm is returning to the old way. In May, the Bank of CanadaBank of Canada data showed that fixed-rate mortgages made up 49% of all home loans, up from 43% in March, the lowest proportion since the Bank began tracking the data in 2013.
In July, James Laird, co-founder of Ratehub.ca, said the trend continued, and that fixed-rate mortgages accounted for more than half of all new home loans.
If the current economic conditions keep you up at night, the best thing to do is get a fixed-rate mortgage and forget about it, Laird said.
Borrowers are increasingly opting for this certainty, even though the fixed rate is only a sliver below the 13-year peak hit in mid-July. If rates decline in the next two to three years, they could be in for higher payments for longer. Refinancing can be a costly option.
The best discounted five-year fixed rate is 4.24%, while the variable rate is 3.5%, the narrowest gap since September, another factor driving more borrowers to the former.
Variable loans are tied to the Bank of Canada'sBank of Canada's benchmark rate, which has gone up 2.25 percentage points since March. Michael Driscoll, head of North American financial institutions at DBRS Morningstar, said if the economy falls into recession due to aggressive interest rate hikes, fixed-rate borrowers will be locked into higher payments even when variable rates come down, which would crimp their spending elsewhere.
The financial system is unlikely to take a hit because of the equity backing these mortgages, as it's inevitable that higher debts and associated losses are inevitable when rates rise rapidly, according to Driscoll.
According to their latest financial statements, Canada's biggest banks' outstanding uninsured mortgages, which account for the majority of their portfolios, are about 50% of the value of the houses they're backed by. The loan-to-value ratio on new originations is below 70%. A down payment of at least 20% is required for uninsured mortgages.
Borrowers are increasingly considering shorter-term fixed-rate home loans, which have been seen as riskier because they expose them to higher rates upon expiry, but the current environment is making them more appealing.
In May, the mortgages of less than five years made up 53% of fixed-rate home loans, compared to 51% in January, according to Bank of Canada data.
In January, it was ''give me your lowest rate and lock it in for as long as you can'', said Mark Ostland, director of mobile experience at Meridian Credit Union.