An aerial view of houses east of Toronto on Nov. 11, 2017.Lars Hagberg/The Canadian Press
The Bank of Canada’s latest interest-rate cut is expected to bolster demand for variable-rate mortgages as homebuyers feel safer gambling on rates remaining low.
Since the central bank started cutting its benchmark interest rate in June, statistics show that more homebuyers have started choosing variable-rate products over fixed-rate mortgages where the interest rate remains the same over the loan term.
Variable-rate mortgages accounted for 25 per cent of all new bank mortgages as of November, according to data from Statistics Canada. That was up from 19 per cent in October and 5 per cent in July, 2023, when the Bank of Canada surprised the market with a pair of interest-rate hikes that summer. Demand, however, still falls short of the pandemic real estate boom when more than half of new mortgages had floating rates.
“Variable has already shed its bad rap,” said Dan Eisner, chief executive of True North Mortgage, a Calgary-based mortgage broker and lender.
Variable-rate loans, which typically move in lockstep with the Bank of Canada’s benchmark interest rate, developed a poor reputation when the central bank tried to cool inflation with aggressive interest-rate hikes in 2022 and 2023. The sharp increase in borrowing costs created havoc for many mortgage holders and their lenders.
Some variable-rate borrowers had to ramp up their mortgage payments, while others saw their loan balances grow because their monthly payments did not cover all the interest they owed.
Meanwhile, the cost of a variable-rate mortgage became more expensive than a fixed-rate loan. In January of last year, the average five-year variable-rate mortgage had an interest rate of 6.23 per cent, compared with 5.07 per cent for the fixed-rate product, according to Mortgagelogic.news.
Now, the gap is narrowing. This January, Mortgagelogic.news says, the five-year variable-rate mortgage had an average interest rate of 4.55 per cent while the average fixed loan was 4.29 per cent.
Mr. Eisner said that three-quarters of his clients are now requesting variable rates, compared with 15 per cent of his clients in June, the month the bank started cutting interest rates. He sees that proportion climbing with Wednesday’s 25-basis-point rate cut to 3 per cent.
Victor Tran, a mortgage broker, has also seen a shift in his clients’ preferences. Mr. Tran said about half of his clients are choosing variable now, compared with 10 per cent in June. Even though variable-rate products are still slightly more expensive than fixed products, he said his clients are willing to take the chance that the central bank will continue to lower borrowing costs.
“They are basically okay to deal with a slightly higher rate for potential long-term gain,” said Mr. Tran, a mortgage and real estate expert with Ratesdotca, a rate-comparison website.
However, that does not necessarily mean that borrowing is up significantly. The outlook for Canada’s economy is uncertain with the spectre of a trade war looming.
“Demand for mortgages is up, but not that strong. Right now people are waiting for the tariff shoe to drop,” Mr. Eisner said.
The Bank of Canada said Wednesday that a tariff war with the United States would trigger major economic damage. And if U.S. President Donald Trump follows through on his threat to slap 25-per-cent tariffs on Canadian goods, some economists are predicting further interest-rate cuts.
That could lead to a situation reminiscent of the pandemic real estate boom, when central banks around the world slashed borrowing costs to stimulate economies. Homebuyers took advantage of the cheap loans, increasing competition and sending the market into a frenzy.
“The sector is so interest-rate-sensitive,” said Phil Soper, president of Royal LePage, a major real estate brokerage.