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Homebuyers opting for short-term, fixed mortgages in hopes rates will fall: Ratehub

The once ultra-popular variable rate mortgage is still seeing a decline among homeowners, the data show

Houses and townhouses are seen in an aerial view, in Langley, B.C., on Wednesday May 16, 2018. Canada's big banks are locked in a competitive pricing war over variable-rate mortgages, but economic trends point to more interest rate hikes ahead — leaving Canadian mortgage borrowers struggling to interpret the mixed messages. THE CANADIAN PRESS/Darryl Dyck
Ratehub.ca data shows homebuyers are increasingly searching for short-term, fixed rate mortgages as variable rate inquiries continue to fall. THE CANADIAN PRESS/Darryl Dyck (The Canadian Press)

Canadian homebuyers are increasingly searching for shorter-term, fixed mortgage rates in the hope of getting a better deal down the line if the Bank of Canada starts cutting its benchmark rate, according to data from Ratehub.ca.

Searches on the site for one- to four-year fixed rates more than doubled to 14 per cent so far this year, from just six per cent last year, the rate comparison website said in a release on Monday. Meanwhile, five-year fixed rate inquiries represented the bulk of searches on the site at 79 per cent, a jump from 66 per cent last year.

Homebuyers are looking at the benefits of short-term, fixed rates as twofold, Ratehub says, because it safeguards them against near-term potential further rate hikes while possibly allowing them to take advantage of lower rates sooner.

“Consumers are currently more interested than usual in short-term fixed rates because many experts are predicting that rates will drop in the coming years,” said James Laird, co-chief executive officer of Ratehub.ca and president of mortgage lender CanWise.

Many economists believe that interest rates have likely peaked, but still see the possibility of one more quarter-point hike this year because of the stronger-than-expected economy.

Variable rate mortgages fall to the wayside

Inquiries for five-year variable rates continue to fall, the data show, accounting for a mere five per cent of overall searches this year, down from 26 per cent in 2022.

Variable mortgage rates had surged in popularity among homebuyers while interest rates were at historical lows, a trend that deepened during the pandemic when the Bank of Canada slashed its benchmark rate to a quarter of a percentage point.

In a Nov. 2022 report, the central bank said a third of total outstanding mortgage debt in Canada was attached to variable rates, up roughly 20 per cent from the end of 2019.

However, with the rapid increase in the benchmark rate over the past 12 months to 4.50 per cent, some homeowners have seen their amortization periods extended significantly, or hit a trigger rate, the point where the monthly payment no longer covers the entire interest portion.

The Bank of Canada estimated at the time of the November report that half of homeowners with variable rate and fixed payment mortgages had hit their trigger rate.

Laird says he doesn’t expect variable rates to see a rebound in demand until interest rates begin to fall.

“We expect demand for variable rates to stay depressed and interest in short-term fixed rates to remain elevated until the Bank of Canada cuts the target for the overnight rate from its current level,” he said.

Ratehub data shows the best five-year variable rate mortgage is currently 5.55 per cent and the lowest five-year fixed rate is 4.29 per cent.

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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