As the mortgage landscape shifts, prospective homeowners in Canada face a challenging environment marked by rising fixed mortgage rates. Since early March, increased bond yields—prompted by concerns over inflation exacerbated by geopolitical tensions in Iran—have led lenders to elevate their fixed-rate offerings, leaving borrowers with fewer attractive options for financing their homes.
Rising Fixed Mortgage Rates
Canadian lenders have responded to the changing economic climate by increasing fixed mortgage rates, which have surged by between 25 and 40 basis points depending on the lender and specific mortgage product. Currently, the lowest five-year insured mortgage rate stands at 4.04 per cent, applicable to those making down payments of less than 20 per cent. For borrowers contributing more than 20 per cent, the lowest uninsured rate is slightly higher at 4.19 per cent. It is crucial to note that these figures reflect the most competitive rates, typically reserved for applicants with exemplary credit histories. In contrast, five-year rates that fall within the middle pricing tier may exceed 5 per cent.
Variable Rates: A Temporary Stability?
While fixed rates are on the rise, variable mortgage rates remain relatively stable, currently priced at a low of 3.35 per cent. However, a recent survey conducted by the Bank of Canada indicates that this stability may not last long. The Q1 Market Participants Survey, which gathers insights from 28 financial market experts, suggests that there is a strong expectation for the central bank to raise its benchmark interest rate by 50 basis points next year, potentially increasing it from 2.25 per cent to 2.75 per cent. Should lenders adjust their prime rates accordingly, borrowers could see five-year variable rates climb to approximately 3.85 per cent. This projection hinges on the assumption that the situation in Iran resolves and inflation stabilises by the end of next year, which could shift if conditions worsen.
What Should Borrowers Do?
The current mortgage landscape prompts a critical question for potential borrowers: Should one opt for a five-year fixed rate exceeding 4 per cent, or take a chance on a variable rate that promises short-term savings? For many seeking the peace of mind that comes with predictable monthly payments, the allure of a lower temporary rate may not outweigh the anxiety of fluctuating market conditions.
A popular compromise is to consider shorter fixed terms, such as two- or three-year options. This strategy allows borrowers to reassess their mortgage situation sooner, ideally when rates may have decreased. Choosing a shorter term can also help avoid the hefty penalties associated with breaking a longer mortgage early—a risk that many are keen to sidestep in this uncertain market.
Demand for Shorter Terms on the Rise
Historically, shorter fixed terms gain traction when interest rates are elevated. In fact, during the summer of 2024, we observed a similar trend. At that time, five-year fixed rates were also hovering in the high fours, while variable rates exceeded 5 per cent, following a series of rate hikes by the central bank. To attract borrowers seeking flexibility, lenders slashed their pricing on three-year terms, which saw demand increase from 5 per cent of all inquiries in January 2024 to 11 per cent by August.
Currently, there are signs that interest in three-year terms is reviving. As borrowers increasingly explore shorter options, lenders have begun offering competitive pricing in this category. Presently, the lowest three-year term rate is slightly higher than the five-year option at 4.09 per cent, marking a potential opportunity for rate-conscious shoppers to secure better deals.
As always, borrowers are advised to consider holding a rate to lock in current pricing, especially if they are months away from finalising their mortgage. Most lenders allow rate holds for up to 120 days, providing a safeguard while awaiting better options.
Why it Matters
The evolving mortgage landscape reflects broader economic uncertainties and highlights the importance of strategic financial planning for prospective homeowners. As fixed rates rise and variable rates remain precarious, borrowers must carefully evaluate their options and consider the long-term implications of their choices. With the potential for further rate increases on the horizon, understanding the nuances of the mortgage market is essential for making informed decisions that align with one’s financial goals.
