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Unprecedented Decline: Variable Rates Hit All-Time Low, Reports NBF

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:


  1. Premium Price Tag: The average uninsured variable rate is nearly 80 basis points higher than the lowest fixed rate.

  2. Market Expectations: Anticipations of lower rates ahead drive borrowers towards fixed rates.

  3. Upside Uncertainty: Unpredictable rate movements post-Bank of Canada messaging.

  4. Variable Reputation: Negative perceptions due to past experiences.

  5. Penalty Risk: Reluctance to pay substantial penalties for breaking a variable term.

  6. Tougher Qualification: Stricter qualifying criteria for variables.


Mortgage Gymnastics for borrowers under pressure

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

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.

Long-run regression line of the U.S. 10yr yield

This multi-faceted selling pressure prompts three potential rate scenarios:

  1. A dramatic surge in rates, defying expectations.

  2. A black swan event leading central banks to cut rates.

  3. Modest rate increase and stabilization.

Canada GDP Annual Growth Rate over Canada Interest Rate
Rates

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.

Ready to explore further? Reach out to me today and start a conversation about your mortgage needs. Your financial journey matters to us.

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