Shorter-term fixed mortgage rates losing appeal: CMHC

Houses for sale in Ottawa

Optimism wanes that interest rates will fall quickly

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Canadian consumers are increasingly forgoing mortgages with terms of less than three years, a shift the Canada Mortgage and Housing Corp. (CMHC) sees as a sign of waning optimism that interest rates will decline quickly.

Data from the CMHC’s Residential Mortgage Industry report, released on Nov. 9, shows borrowers have started to prefer fixed-rate mortgages with terms between three and five years. Fixed-rate mortgages with terms between one and three years, meanwhile, are losing popularity.

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The change marks a reversal of a recent trend that saw consumers flock to shorter-term mortgages in the belief that interest rates might soon return to the ultra-low levels seen during the pandemic.

CMHC data shows that in August 2022, fixed-rate mortgages with terms of three to five years constituted 14 per cent of the residential market. By August 2023, the segment accounted for 51 per cent.

The percentage of mortgages with terms ranging from one to three years has also risen in that time frame — to 21 per cent from 19 per cent — but has plunged significantly from its recent peak of 36 per cent in February 2023.

Variable-rate mortgages, meanwhile, also became less prevalent, plummeting from a 45 per cent market share to a mere six per cent over the same period.

“This preference is driven by a noteworthy discount offered by fixed-rate mortgages relative to variable-rate mortgages and concerns about further rate hikes,” the CMHC said.

Since March 2022, the Bank of Canada has raised its overnight interest rate 10 times. As a result, mortgage renewals during this period have faced substantially higher rates.

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“In the first half of 2023, more than 290,000 borrowers with fixed-rate mortgages encountered a significant increase in interest rates upon renewing their loans … the resulting increase in their debt-servicing costs is putting financial pressure on these borrowers,” CMHC said.

While mortgage arrears overall have stabilized at a historically low rate — with just 0.15 per cent registering delinquencies of 90 days or more — arrears for borrowers with mortgage loans exceeding $400,000 have risen two basis points to 0.10 per cent since the second quarter of 2022.

Mortgages arrears chart

The percentage of borrowers with mortgages of at least $850,000 who are in arrears is rising even more quickly, up three basis points to 0.13 per cent in the same time period. Arrears rates remained higher for borrowers with smaller mortgages, but at a consistent level.

The second quarter was also marked by significant rises in both second-stage (30-59 days overdue) and third-stage (60-89 days overdue) mortgage delinquency rates compared to the prior year, a worrying sign, according to the CMHC.

“An increase in these initial stages in the delinquency process suggests that borrowers are beginning to encounter financial strain,” the agency said.

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This week at a press conference in Vancouver, Carolyn Rogers, the Bank of Canada’s senior deputy governor, said Canadians should be prepared for higher interest rates going forward.

“It’s not hard to see a world where interest rates are persistently higher than what people have grown used to,” Rogers said.

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