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Rising Number of Homeowners Opting For Short-Term, Fixed Mortgages

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As interest rates continue their steep climb, more and more borrowers are opting for short-term, fixed-rate mortgages come renewal time.

In a new Nesto report analyzing mortgages taken out in October, an increasing number of borrowers were found to be opting for fixed-rate mortgages. Looking at the data, the report says, “it becomes clear that the penchant for security outweighs any benefits of flexibility that a variable mortgage can provide.”

In November 2021, when the Bank of Canada’s overnight lending rate sat at a historically low 0.25%, the majority of borrowers were opting for variable rates, with 80% choosing to do so. Cut to October 2022, and now just 53% opted for fixed rates, while the remaining 47% went for variable.

October saw the Bank’s sixth rate hike since March, bringing its overnight lending rate up to 3.75%. With inflation remaining stubbornly high, some experts are predicting yet another rate hike in December.

Victor Tran, a mortgage expert with RATESDOTCA has anecdotally seen an uptick in fixed-rate mortgages, specifically for ones that range from one to three years, as a direct result of rising interest rates.

“Locking into a one-or two-year fixed-rate mortgage with the intention of riding out the current volatility in the mortgage market is a strategy that might work for some and not for others,” Tran said. “For those who are maxed out on their home expenses and can’t handle another increase, locking into a longer-term fixed rate might be a better option. Additionally, short-term fixed rates are slightly higher than five-year fixed rates at the moment, so consumers would be paying more to be on this strategy.” 

RATESDOTCA data found that the number of mortgage quotes given in October for fixed and variable mortgages differed by just 56 quotes — a significantly smaller gap than the 619-quote and 721-quote differences seen in August and July, respectively.

“A large part of that is because of the procedure to qualify for a fixed-rate mortgage,” said Dan Eisner, CEO of True North Mortgage. “Now that the prime rate has moved up, qualifying for fixed and variable is similar. So, we’re seeing people trying to adapt to that normal dynamic. Right now, we are seeing an even split — more or less — between variable and fixed.”

With home sales across the country slowing, RATESDOTCA data, unsurprisingly, reveals a slowdown in mortgage activity in general. In October, mortgage quotes for primary properties were down 59% while quotes for vacation properties fell 64%.

After September saw the highest number of mortgage quotes for investment properties out of any month of the year, interest fell sharply in October, with the number of quotes dropping by more than 60%.

“When it comes to investment properties, I think there are a lot of people who are waiting on the sideline,” Eisner said. “If you are a buyer and are in no rush, you might as well wait to see which direction market conditions will go – will property values fall further? Or will they stabilize? That could explain why there is a slowdown in investment activity.”

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