Borrowers turning back to fixed rate mortgages as rates rise, discount on variable shrinks

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Mortgage growth slowed and consumers increasingly turned back to fixed-rate mortgages as interest rates rose in the second quarter of 2022, according to an analysis of trends in the Canadian mortgage market, published by the Canada Mortgage and Housing Corporation Wednesday.

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“An economic environment tinted by uncertainty, rising interest rates and inflationary pressure has contributed to the decrease in new mortgage originations in the first two quarters of 2022,” the national housing agency said in its Residential Mortgage Industry Report for Fall 2022.

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As a result, mortgage loans for property purchases dropped by 5.5 per cent while refinancings decreased by 13.3 per cent. During the same period, conventional lenders contributed $191-billion worth of mortgage loans, a decline of 7.9 per cent, while alternative mortgage lenders lent a total of $110 billion in mortgage loans, a drop of more than 23 per cent year over year.

The share of borrowers choosing variable rate mortgages has also trended downwards in recent months after peaking at 56.9 per cent to start the year.

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The declining discount on variable rates is in large part to blame. As the discount dissipates, consumers tend to prefer fixed-rate mortgages. For example, in 2019, discounts on variable mortgages remained in the negative for almost the whole year, which caused the share of variable mortgages in the marketplace to slip to an average of 10.9 per cent.

2022 started strong with a 106 per cent discount on variable mortgages in January, leading to variables capturing 56.9 per cent of the market. However, as the Bank of Canada’s interest rate increased, August’s discount dipped to 49 per cent while the market share of variable mortgages also dipped to 44.2 per cent.

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Since the end of the second quarter, all lender types have lent more funds to new and renewed mortgages under fixed-rate agreements than variable-rate agreements, the report said. The central bank also estimates that mortgage payments for borrowers who signed up for variable-rate mortgages in 2021 had increased by an average of 20 per cent by the end of October.

As consumer confidence slows and fewer Canadians take on mortgages, borrowers who have chosen to make a financial commitment to a fixed-rate mortgage have increasingly preferred to make shorter-term commitments (less than five years).

Yet, even with this strategy, “Canadian households are facing record levels of real estate debt,” CMHC said in the report.

“As of August 2022, residential mortgage debt stood at $2.05 trillion (+8.8 per cent compared to August 2021).”

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