Expectations that interest rates will continue to fall following the Bank of Canada’s latest cut are fuelling demand for variable rate mortgages, brokers say.
On Wednesday, the central bank cut its key overnight lending rate by 50 basis points to 3.75 per cent, saying it is now officially on a rate cutting path as it wants to see consumer and business spending pick up again. Economists were quick to forecast another large cut by the Bank in December.
After the announcement, mortgage brokers surveyed by the Star reported that they are receiving more inquiries than usual for variable rate mortgages after years of consecutive rate hikes made many Canadians risk-averse.
Historically, variable rates have outperformed fixed rates, but are riskier should the Bank of Canada hike rates again.
“Homeowners and even those looking to enter the market are starting to show more interest in a variable rate mortgage product, especially with speculation that there will be further cuts by the end of the year,” said Daniel Vyner, broker of Toronto-based boutique mortgage firm DV Capital.
Rates fell 1.25 per cent from five per cent since the Bank of Canada started cutting in June. For every 25-basis point decrease, variable-rate mortgage holders can expect to pay approximately $15 less per $100,000 of mortgage, according to an analysis by rate comparison website Ratesdotca.
And despite variable rate mortgages currently more expensive than fixed, the anticipation of further cuts is enough to steer many Canadians to variable rate loans, Vyner said, especially since they have the option to switch to a fixed rate with their lenders at no cost.
Based on Vyner’s calculations comparing three-year fixed and variable mortgages, fixed rates outperform variable by 60 basis points for insured products and 80 basis points for conventional products on average.
Another mortgage expert contends that paying a little more for a variable mortgage now while the housing market is quiet might make more sense than waiting for more rate cuts.
“How much more would your mortgage cost if the next cut ignites the market and the home you want is the target of a bidding war?” Clay Jarvis, real estate expert with personal finance company NerdWallet, wrote in an analysis.
Mortgage broker Ron Butler estimated that out of 100 calls his brokerage received since Wednesday, 30 were inquiries about variable rate mortgages. “It’s an absolute sentiment changer on the future of variable rates,” he said.
Recently, his general advice to borrowers has been to go for variable rate, and wait and see until rates seem to have reached a bottom, which will likely happen next spring.
“You’ve got to watch it carefully. It’s a little bit of work for the consumer — for the borrower — but they’ve got to do it.”
When you suspect interest rates have hit bottom, said Butler, switch to a five-year fixed mortgage. The same strategy applies to homeowners renewing their mortgages in the next four months or so, he added.
