Demand for variable mortgage rates down 21% compared to 2022

The popularity of variable-rate mortgages has significantly declined in the past year due to consecutive interest rate hikes by the Bank of Canada. Borrowers are now favoring fixed-rate mortgages for slightly lower costs and overall stability.

Recent data from RateHub reveals that inquiries for five-year variable rates on their website accounted for only 5% of all user submissions in 2023, compared to 26% in 2022. In contrast, demand for five-year fixed mortgages has been steadily increasing, With inquiries now representing 79% of all submissions, up from 66% in 2022.

In Canada, fixed-rate mortgages have traditionally been the most popular option, accounting for about 80% of the market share. However, the demand for variable mortgages surged during the pandemic when the Bank of Canada significantly reduced its benchmark rate to a historic low of 0.25% in March 2020. This low rate remained in effect until March 2022, offering borrowers exceptionally low floating-rate debt for a two-year period.

Borrowers eagerly took advantage of these attractive interest rates. According to a report from the Bank of Canada in November 2022, the market share of variable mortgages had increased to one-third of all outstanding mortgage debt, up from 20% at the end of 2019 .

According to James Laird, Co-CEO of Ratehub.ca and President of CanWise mortgage lender, while fixed rates were also priced at record lows at the time, the spread between the rate types was too attractive for many borrowers to pass up.

“During the pandemic, mortgage rates reached historic lows, dropping as low as 0.85% for a 5-year variable rate and 1.39% for a 5-year fixed rate,” he says. “Variable rates became more popular than usual, accounting for over 20% of Ratehub.ca mortgage rate inquiries.”

However, this trend abruptly reversed in the first quarter of 2022 when the Bank of Canada started raising its rate in response to rising inflation. The central bank aimed to bring the Consumer Price Index back down to its target range of 2%. Factors such as post-lockdown economic recovery, geopolitical tensions, and supply-chain disruptions had driven inflation to a 40-year high of 8.1% in June 2022.

To combat inflation, the Bank of Canada implemented a series of eight rate hikes, bringing the Overnight Lending Rate to a 15-year high of 4.5%. It is expected that this rate will remain stable in the near future. Consequently, the current best five-year variable rate has increased to 5.55%. On the other hand, rates for fixed-rate mortgages have recently declined due to volatility in the bond market. The best five-year fixed mortgage rate available is currently 4.29%. The 126-basis-point difference between the two rates, coupled with the stability offered by fixed rates in a volatile rate environment, has made fixed-rate mortgages desirable once again.

“With the Bank of Canada rate hikes and overall rise in mortgage rates, consumers have switched back to fixed rates, with 95% of rate inquiries to Ratehub.ca in 2023 being for fixed rates,” says Laird.

Borrowers increasingly considering shorter-term options

The data also reveals a notable trend of growing demand for shorter-term fixed rates. Borrowers are seeking to secure their mortgage rates while keeping the option open for potential lower rates in the near future.

“Consumers are currently more interested than usual in short-term fixed rates because many experts are predicting that rates will drop in the coming years,” Laird adds. “Getting a short-term fixed rate allows borrowers to take advantage of future lower rates sooner.”

Demand for variable won’t return until rate cuts

Both the Bank of Canada and the US Federal Reserve have strongly signaled that they have concluded their rate-hiking cycles, as long as economic indicators, such as inflation growth and GDP, align with their forecasts. This has led to market expectations of rate stability for the remainder of the year.

However, until the Bank of Canada actually implements an active reduction in its benchmark rate, there is limited relief on the horizon. Given the gradual decline of inflation, borrowers can expect elevated borrowing costs to persist in the coming months.

Bank Governor Tiff Macklem, following the rate announcement on April 12th, stated that while the March inflation rate of 4.3% was a “welcome relief,” the Bank foresees the Consumer Price Index (CPI) remaining above its target until at least 2024. In the event of potential recessionary factors, the central bank might consider cutting rates for the first time in two years. And, according to Laird, variable-rate popularity won’t be bouncing back in the interim.

“We expect demand for variable rates to stay depressed and interest in short-term fixed rates to remain elevated until the Bank of Canada cuts the target for the overnight rate from its current level,” he says.