In June 2023, a groundbreaking 95% of new mortgages embraced fixed rates, marking a historic low in variable market share, according to Daren King of National Bank Financial.
This stark contrast to the preceding months, where up to 57% of borrowers opted for variable rates, reflects a shift in sentiment due to multiple factors.
Contrary to NBF's findings, borrowers' aversion to variable rates is not entirely unexpected, and here are six reasons fueling this trend:
Premium Price Tag: The average uninsured variable rate is nearly 80 basis points higher than the lowest fixed rate.
Market Expectations: Anticipations of lower rates ahead drive borrowers towards fixed rates.
Upside Uncertainty: Unpredictable rate movements post-Bank of Canada messaging.
Variable Reputation: Negative perceptions due to past experiences.
Penalty Risk: Reluctance to pay substantial penalties for breaking a variable term.
Tougher Qualification: Stricter qualifying criteria for variables.
Revealing data illustrates that the lowest nationally-advertised uninsured stress test rate at 7.79% (5-year fixed) provides borrowers:
8.2% more mortgage compared to a 1-year fixed
5.2% more mortgage than a 2-year fixed
3.3% more mortgage compared to a 3-year fixed
1.3% more mortgage than a 4-year fixed
4.9% more mortgage than a variable fixed
The Latest Rate Insights
As mortgage rates align with rising yields, various catalysts trigger discussions of an ongoing bond bear market. Factors include a brighter growth outlook, rising federal debt-servicing concerns, larger deficit spending, increased bond issuance, diminished foreign investment, changes in the Bank of Japan's yield curve control, and structurally higher inflation.
This multi-faceted selling pressure prompts three potential rate scenarios:
A dramatic surge in rates, defying expectations.
A black swan event leading central banks to cut rates.
Modest rate increase and stabilization.
In the current mortgage landscape, short-term rates spanning one to three years occupy the majority share. As yields trend upward, borrowers exploring 1- to 3-year fixed rates are urged to secure their terms promptly.
Of note, the week saw the three-year fixed rate take a hit, rising almost a quarter-point since the previous report, impacting its competitiveness compared to 1- and 2-year terms.
Takeaways:
Renewal Landscape: Declining origination volumes intensify competition among lenders for renewal deals.
Oil's Influence: Fluctuations in WTI oil prices could impact inflation and interest rates.
Yield Projections: BMO Capital Markets' Sal Guatieri projects that 10-year bonds could eventually settle 50-100 bps above the neutral rate.
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