Canadian Mortgage Borrowers Have Rate Cut FOMO, Snub 5-Year Terms

Canadian mortgage borrowers won’t take on the risk of a variable rate mortgage, but they’re dreaming of rate cuts. Bank of Canada (BoC) data reveals a record share of mortgage originations had fixed interest terms in June. However, they aren’t opting for a longer, and traditionally more popular, 5-year fixed term. National Bank of Canada (NBC) found that borrowers are hoping to avoid short-term hikes, but don’t want to miss out on any potential rate cuts. 

Canadian Mortgages Hit A Record For Fixed Term Originations

Rising interest rates have sent mortgage borrowers back to fixed rate mortgage terms. A record 95% of mortgage originations were fixed rate in June, a new record high. It stands in sharp contrast to just last year, when the majority of mortgages were variable rates. 

 “That’s a surprising development, given that many believe we’re nearing the peak in policy rates and that a downturn is likely,” says Daren King, an economist at NBC, one of Canada’s Big Six banks.  

He adds, “Does this mean that households are locking in at potential rate peak for the long term? Not so fast. Gone are the days when the vast majority of borrowers locked in a 5-year term.”  

Canadians Are Hoping For Rate Cuts, and Opting For Shorter-Terms

King’s research reveals this time is different. Fixed terms hit a record, but the 5-year fixed rate terms fell to just 13% of organizations in June—a record low. It’s a very big shift from the 65% share seen at the peak in 2020. Congrats if you nailed that call btw.   

“There is reason to believe that they opted for this option because it is more favorable than the shorter term options (1 to 2 years) which reduces the payment and eases qualification,” says King. 

King is apparently referencing the closing gap in financing costs for 3 to 5 year mortgages. In June, mortgages with terms from 3 to 4 years, had an average rate similar to a 5-year fixed rate. Interest rates for shorter terms were much higher, resulting in higher costs and less leverage for borrowers.  

Canadian Mortgage Borrowers Have Rate Cut FOMO

So why not lock down a 5-year fixed term if costs are similar? “…they don’t want to miss out on possible rate reductions down the road,” says King. 

Most households see lower rates down the road, and most experts agree that’s likely to come. When and how low, are a much more difficult game to guess. Consumers anticipating rate cuts mean any weakness can reignite the inflation rocket. The Bank of Canada got a taste of that when it “paused,” and is unlikely to want a repeat of the issue. Especially with home prices close to becoming inflationary. 
How low is a bigger guess than calling rate cuts. Many think of “normal” interest rates as 2019-levels, but those were stimulus levels post-Global Financial Crisis. A variety of factors led to global investors providing excess liquidity, driving bond yields (and financing rates) lower. Experts warn those factors are quickly reversing now that inflation has returned, and geopolitical issues make bond markets less hospitable.