Following this months interest rate hike from the Bank of Canada, some mortgage brokers say variable rate products are still popular despite the risk of further increases.
The Bank of Canada increased its key policy rate on Dec. 7 by 50 basis points to 4.25 per cent. The central bank’s final rate hike of 2022 could mark the “zenith” of its tightening cycle, according to a note to investors from Avery Shenfeld, the chief economist at the Canadian Imperial Bank of Commerce.
Following the potential peak in the central bank’s monetary tightening cycle, here is a look at what mortgage brokers are seeing:
Seven interest rate increases in 2022 have had an impact on individuals with a variable rate mortgage, according to Leah Zlatkin, a mortgage broker working in Toronto and expert with LowestRates.ca.
“People who have variable rates are experiencing severe pain right now. Many people are hesitant to sign up for a variable rate because they feel that rates may continue increasing,” Zlatkin said in a phone interview on Dec. 14.
Zlatkin said if a client with a variable rate mortgage feels like the payments are too much to afford then changes can be made to their mortgage. This includes changing their amortization, looking for a longer term to reduce payments, switching to a different mortgage product or consolidating consumer debt.
Amid higher interest rates, some individuals are still opting to take on a variable rate mortgage, Zlatkin said.
“So the strategy most of my clients are opting to pursue is either they set up a variable rate, like a five-year variable and they're waiting to see if lower rates come out in the spring of this coming year and [if not] hopefully jump ship on their variable and move to a lower rated product,” she said.
James Laird, co-chief executive officer of Ratehub.ca and president of CanWise Mortgage Lender, said in a phone interview on Dec. 14 that people are starting to look more at variable rates as borrowing costs are potentially nearing a peak.
“The variable is still being considered because of course it'll adjust down if rates drop,” Laird said.
However, there is uncertainty surrounding what course of action the central bank will take in 2023. As such, Laird said variable-rate products should be only for individuals with “wiggle room” in their finances.
“Variables are only ever appropriate for households who can afford that increased exposure to risk,” Laird said.
“So hopefully those people who were in variables this year fit that profile because if they didn't, it's been a tough year.”
Clinton Wilkins, mortgage broker and team leader at Clinton Wilkins Mortgage Team in Halifax, said in a phone interview on Dec. 14 that he is not seeing people with a variable mortgage convert into a fixed product.
“We’re still seeing a lot of new mortgage clients still taking the variable today, even after the last Bank of Canada increase earlier this month,” Wilkins said.
The reason why many are still opting for a variable-rate mortgage, Wilkins said, is because of widespread expectations that interest rates will remain high next year, but after that will start to “soften.”
“They are forward thinking that a little bit of pain today will lead to savings down the road,” Wilkins said.
Additionally, Wilkins added that variable-rate mortgages are flexible and clients can convert into a fixed-rate product with no penalty.
SHORT-TERM FIXED MORTGAGES
Another common strategy to weather the storm of high-interest rates is a short-term fixed mortgage, according to Zlatkin.
“Alternatively, a lot of clients are just doing the stick your head in the sand approach where they're signing on for [a] one- or two-year fixed [mortgage] to ride out this storm,” she said
Following the one- or two-year period, Zlatkin said mortgage owners can then figure out if a better rate is available, “which there probably will be because hopefully, things [high interest rates] will have passed by then.”
According to Laird, there has been “unusually high” interest in short-term fixed-rate mortgages following the most recent interest rate hike.
“The thinking there is rates are going to stay elevated for a little while, but not forever. And so having a renewal come up after one or two or three years is better than having it come up after five years,” Laird said.
For the majority of households, Laird said mortgage renewals “aren’t as bad as we might think.” Laird said this is primarily due to the fact that home prices were markedly lowered in previous years.
“And five years ago, everyone would have had to pass a stress test at around five per cent,” Laird said adding that many Canadian households are earning more income than when they initially would have purchased their home.
He said that despite facing higher interest rates upon renewal and barring a change in household income, the higher rate should still be affordable but sacrifices to savings or lifestyle might be required.
“Unless something unusual has happened in the household, the renewal is possible. You're paying more but the household can afford to pay more because it passed a stress test at a rate very similar to this,” he said.
Meanwhile, Zlatkin said renewals will put many Canadians into a difficult situation.
“If you look at somebody who got a mortgage five years ago, and they're renewing in the spring or in the next few months, what you're going to see is that they're going from rates of around two to three per cent. [However] the current rate is around six per cent,” Zlatkin said.
Wilkins said he has concerns regarding homeowners with a looming renewal next year and a variable rate, as those borrowers are likely to experience “sticker shock.”
Amid uncertainty regarding interest rates, Zlatkin said that many people are worried and are “sitting on the sidelines.”
“Now with uncertainty, there's also opportunity. So if you're a first-time homebuyer and you've been sitting on the sidelines waiting, right now might be the best time to get into the market,” she said.
As many people are hesitating, the current market conditions are favourable to buyers, according to Zlatkin.
“And if you are an opportunist, and you feel confident that your employment status is not going to change over the next few years, it could be a really good opportunity for you to get in near the bottom of the market,” she said.
Despite potentially favourable buying conditions, Laird urges prospective buyers to determine the best time to purchase based on their household financial situation, not necessarily the state of the market.
“It should really be based on what's going on with your personal financial situation and less so trying to time a housing or mortgage market,” he said.