Despite interest rates potentially being at or near a peak, borrowers aren’t betting on rate cuts anytime soon.
New data show that a record 95% of borrowers opted for a fixed-rate mortgage in June, according to a research report by National Bank Financial’s Daren King.
He says that’s a “significant turnaround” from early 2022 when rate hikes were just getting started and just 43% of originations had a fixed mortgage rate.
“That’s a surprising development, given that many believe we’re nearing the peak in policy rates and that a downturn is likely,” King wrote.
Will borrowers miss the boat on rate cuts?
Does that mean today’s borrowers are putting themselves at risk of missing the boat and leaving money on the table once the Bank of Canada does start cutting interest rates?
Not necessarily, King argues.
“Gone are the days when the vast majority of borrowers locked in a five-year term,” he notes. “In fact, borrowers are reluctant to lock in such a high-rate as evidenced by a record low 13% opting for this term.”
Instead, a majority of borrowers—roughly 55%—are selecting three- and four-year terms.
“There is reason to believe that they opted for this option because it is more favourable than the shorter term options (1 to 2 years), which reduces the payment and eases qualification,” he added. “However, they don’t want to miss out on possible rate reductions down the road.”
Three- and four-year terms should place those borrowers in a good position to renew at a lower rate, as rate cuts are expected to be well underway by that time.
Current bond market pricing puts a roughly 30% chance of the first Bank of Canada rate cut coming in March 2024. However, as rate watchers are keen to remind us, any economic data release can cause current forecasts to change.
Among the big bank forecasts, most expect the Bank of Canada’s overnight target rate—currently at 5.00%—to fall to between 3.50 and 4% by the end of 2024.