Canadians shifting to fixed rate mortgages

Rising interest rates across Canada have impacted residential real estate market activity in a significant way in the past year.

They’ve also impacted how Canadians look at mortgages these days with the higher carrying costs to purchase a property.

A recent Residential Mortgage Industry report by Canada Mortgage and Housing Corporation provides an economic analysis of the residential mortgage industry in Canada. It reviews the latest data in the Fall on insured and uninsured mortgages from all lender types and provides details on emerging trends in the Canadian residential mortgage industry.

The latest report, as the interest rate hike environment settled in, highlighted the top three trends in the mortgage industry from the Fall:

  • After increasingly opting for variable rates, more than half of Canadian homeowners chose fixed-rate mortgages;
  • Some people are having a hard time getting loans from regular banks due to stricter rules and higher interest rates. Alternative lenders are a growing market for these people; and
  • Mortgage loans for property purchases decreased by 5.5 per cent and refinanced mortgages decreased by a whopping 13.3 per cent.

“The gap between homeowners choosing variable-rate and fixed-rate mortgages has been closing. Since June 2022, federally regulated financial institutions have lent more funds for new and renewed mortgages under fixed-rate agreements than variable-rate agreements: 55 per cent of recent mortgage borrowers opted for a fixed-term mortgage,” said the CMHC.

“So far in 2022, consumers who have opted for fixed-rate mortgages have favoured shorter-term commitments — less than five years — versus mortgages of five years or more.”

Stricter mortgage rules coupled with rapidly increasing interest rates make it harder for some mortgage borrowers to get a loan from conventional lenders, explained the federal agency.

“This means fewer mortgage borrowers can switch from an alternative lender to a conventional one at their loan term. We see a larger share of mortgage borrowers renewing their loans in the alternative lending space — either with the same alternative lender or another. As it becomes increasingly challenging to qualify under the current interest rate environment, one in three mortgage borrowers renews with an alternative lender,” it said.

“About 70 per cent of mortgage borrowers had an effective exit strategy. This is lower than in 2020 and 2021 when this figure was stable at 72 per cent. This recent drop was also because fewer properties sold at loan term.

As these mortgage borrowers stay in the alternative lending space for a longer time — and pay higher interest rates — housing affordability is an issue for them.”

The CMHC said a decrease in new mortgage originations is because of: economic uncertainty; rising interest rates; and inflationary pressure. 

“As interest rates increased and housing markets cooled, mortgage loans for property purchases dropped by 5.5 per cent. Refinanced mortgages had the most significant decrease at 13.3 per cent,” said the agency.

“Chartered banks originated $191 billion worth of mortgage loans. This is a 7.9 per cent decrease compared to the same period in 2021.Non-bank mortgage lenders such as credit unions, mortgage finance companies and mortgage investment entities issued $110 billion worth of mortgage loans. This is a more than 23 per cent drop compared to the same period in 2021.”

A Provincial Housing Market Outlook by TD Economics  said the Bank of Canada’s tightening of the market is expected to culminate with one additional modest hike in interest rates by 25 basis points in January.

According to a report in the Toronto Star, RBC predicts the overnight rate will stay put at 4.25 for all of 2023, and will start to fall in early 2024. The seven hikes from 2022 are still working their way through the economy.

(Mario Toneguzzi is a veteran of the media industry for more than 40 years and named in 2021 a Top Ten Business Journalist in the world and only Canadian)