Demand grows for variable mortgages

CMHC report shows that the number of homebuyers choosing this hit 44 per cent, a five-year high

An increasing number of Canadians are opting for variable rates when they enter the mortgage market, according to a new report from the Canadian Mortgage and Housing Corporation (CMHC).

While the majority of homebuyers continue to sign up for the five-year fixed term, there has been a significant increase in the number of people opting for variable rates, with the share reaching a high of 44 per cent in 2018 — the highest rate over the previous five years, according to CMHC’s Residential Mortgage Industry Report released Wednesday. CMHC’s senior economics and research analyst Seamus Benwell said the shift toward variable rates started at the end of 2017 and into early 2018, mainly due to the size of the discounts being offered on variable rate mortgages.

“The way the variable rate is set is based on the expectations of future interest rates. So, with the expectation of increasing interest rates moving forward, that led to the discount,” Benwell said.

Interest rates across the board have been inching up over the last few years, making those discounts more attractive than they were a few years ago when rates were at an all-time low, he said.

Signing up for either one of the two options is a personal decision, he said, but the key difference is the stability that comes with the fixed rate.

“You know what the interest rate is going to be for the life of the loan, whereas with the variable rate there’s the discount at the moment, and that’s what is driving people toward the variable rate option.”

But if mortgage rates rise, it can become more costly to pay off a variable rate mortgage.

The CMHC report also highlighted a big jump in uninsured mortgages, which overtook insured mortgages — as measured by total dollars borrowed — in early 2018.

According to the report, mortgages insured by CMHC now account for less than one in three new mortgage loans, even though just five years ago they accounted for the majority of outstanding mortgages.

The surge in uninsured mortgages is mainly due to regulatory changes, particularly the mortgage stress test, which required that home buyers meet stricter conditions to get mortgage insurance.

New rules restricting low ratio mortgage insurance to loans of less than 25 years also had an effect, as did increases in mortgage insurance premiums, according to the report.

In short, more buyers are turning to the uninsured mortgage funding model because policy-makers have increased the costs of insured lending, said Robert McLister, founder of RateSpy.

The mortgage stress tests have “disqualified tens of thousands of borrowers from traditional financing, forcing many into the arms of uninsured, nonprime and non-federally regulated lenders,” he said.