Canadian home buyers pile into variable loans, blunting impact of rising fixed rates

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TORONTO, Oct 14 (Businesshala) – The country’s red hot housing market is unlikely to slow down due to recent bond yield increases by major Canadian banks to raise fixed mortgage rates, as more than half of new borrowers are convertible- Loans that charge rates are the cheapest ever.

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The market share of new variable-rate mortgages rose to 51% in July, the highest level since the Bank of Canada began tracking data in 2013, down from 10% in early 2020, and mortgage brokers say It has continued to grow since then. Then.

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This change is the result of a widening gap between variable rates, which move in tandem with the overnight rate, and fixed rates, which tend to be higher after bond yields. The Bank of Canada is set to further expand the spread due to a pledge that it will not raise the benchmark rate until the second half of 2022, even as bond yields on rising inflation continue to rise.

This, in turn, means that the popularity of variable-rate mortgages will increase further, reversing the trend that has been going on for more than a decade, according to experts.

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Rising demand for housing during the pandemic has prompted the nation’s mortgage insurer and the Bank of Canada to warn of rising risks, and politicians have vowed to take steps to increase affordability. Nevertheless, the central bank’s own low rate policies have helped fuel rising demand.

“We are at a point where there is artificial suppression of short-term, central bank controlled rates,” said mortgage broker Ron Butler. But “market-based rates like the five-year fixed ‘no no no, I think the rates will have to go up’.”

But “the impact on the market, where the variable rate is so low, is very blurry,” he said.

Canada’s largest banks have raised their five-year fixed rates in response to a rise in bond yields – from the Royal Bank of Canada’s rate of 2.44% to Toronto-Dominion Bank’s 2.29%.

According to rate comparison site RateHub.ca, this has pushed the average discounted fixed mortgage rate to a 16-month high of 1.94% as of Wednesday, while the discounted variable rate has dropped to a record 0.95%.

“The variable rate is half the fixed rate,” said James Laird, co-founder of RateHub.ca, “the demand for variable-rate mortgages typically rises when they are at least 75 basis points cheaper than fixed. “This is the most extreme difference we’ve seen.”

Mortgage-driven income growth for banks during the pandemic, but as economies open up, banks have more opportunities to lend and their willingness to pass on their higher borrowing costs to home buyers reflects that flexibility.

Newhaven Asset Management Portfolio Manager Ryan Bushell said the increase in fixed rates suggests some of the eagerness of banks during the pandemic to boost mortgage lending to deploy additional capital has waned.

The fact that they are prompting more borrowers to switch to variable-rate loans shows that they “want people to adjust the curve quickly,” he said, because any central bank interest rate hikes will help. Floating rates will increase, while fixed rates remain the same.

Rob Colangelo, vice president and senior credit officer at Moody’s Investors Service, said a pullback in aggregate mortgage demand would only occur if bond yields increase by 100 basis points or more, although this would be offset by better margins for lenders.

“If bond yields continue to rise, they may need to make adjustments here and there, but I don’t think they … will be as significant as the Bank of Canada says on a 50 to 100 basis.” Rates are going to go up. Points, for example,” he said.

Reporting by Nicola Saminether Editing by Denny Thomas and Steve Orlofsky

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