Personal Finance

Canada’s housing market unlikely to cool as new home buyers opt for variable loans – National

A recent move by major Canadian banks to raise fixed mortgage rates on the basis of rising bond yields is unlikely to slow the country’s red-hot housing market as more than half of new borrowers get variable rate loans that are the cheapest they have. ever was.

The market share of new variable rate mortgages rose to 51% in July, the highest level since the Bank of Canada began tracking the data in 2013, from less than 10% in early 2020, and mortgage brokers They say this has certainly continued to increase.

The change is the result of a growing gap between variable rates that move along with the overnight rate and fixed rates, which have kept bond yields higher. The spread will expand further, thanks to the Bank of Canada’s promise that it will not increase the benchmark rate until the second half of 2022, even if bond yields continue to rise due to rising inflation.

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

Rising demand for homes during the pandemic has prompted the nation’s mortgage insurer and the Bank of Canada to warn of mounting risks, and politicians have pledged to take steps to boost affordability. However, the central bank’s own low interest rate policies have helped fuel growing demand.

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

But “the effect on the market, where the variable rate is so low, is very attenuated,” he added.

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

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That has brought the average discounted fixed rate to a 16-month high of 1.94% as of Wednesday, while the discounted variable rate fell to a record 0.95%, according to the rate comparison site.

“The variable rate is half the fixed rate,” co-founder James Laird said, adding that the demand for variable rate mortgages generally increases when they are at least 75 basis points cheaper than fixed ones. “This is the most extreme difference we have seen.”

Mortgages drove bank profit growth during the pandemic, but as economies open up, banks have more opportunities to make loans, and their willingness to pass their higher borrowing costs onto home buyers shows that flexibility. .

The rise in fixed rates illustrates that some of the enthusiasm of banks during the pandemic to push home loans to deploy excess capital has waned, said Newhaven Asset Management portfolio manager Ryan Bushell.

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The fact that they are driving more borrowers into variable rate loans shows that they “want people to adjust faster to the upward curve,” he said, as any increase in central bank interest rates would raise floating rates while that the fixed rates remain the same.

A pullback in overall mortgage demand will only come if bond yields rise 100 basis points or more, though this would be offset by better spreads for lenders, said Rob Colangelo, vice president and senior credit officer at Moody’s Investors Service.

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“If bond yields continue to rise, they may need to make adjustments here and there, but I don’t think … they will be as important as if the Bank of Canada said they were going to raise rates from 50 to 100 basis points, for example, ”he said.