By Craig Wong

The decision by the Bank of Canada to cut its key interest rate target this week was good news for borrowers with variable-rate mortgages, bringing back some of the shine for the once popular loans.

The rate cut prompted big commercial banks to lower their prime rates, which are used to set the rates charged for variable-rate mortgages.

Toma Sojonky, a mortgage broker at Verico Paragon Mortgage Group in West Vancouver, B.C., says variable-rate mortgages are beginning to regain some traction with clients after falling out of favour when the rate-hiking cycle began.

“I think there are folks who understand that the pendulum is swinging the other way,” he said.

Those with a variable-rate mortgage have had a wild ride since the start of the pandemic.

When the Bank of Canada cut interest rates to nearly zero in the spring of 2020, those with variable-rate mortgages saw the rates charged on their loans fall too, helping fuel their popularity.

But the reverse was also true. When the central bank started rapidly raising rates in 2022 in an effort to bring inflation under control, those with variable-rate loans saw their costs march higher in lockstep. The increase in rates meant either higher payments or less principal being repaid on the loans.

Borrowers who saw the interest rates charged on their loans more than double saw their monthly payments increase by hundreds of dollars or the amortization period of their loans extended by years.

The popularity of variable-rate loans plunged.

But the economy has shifted once more and the central bank has cut interest rates three times this year so far and suggested more cuts were coming.

In announcing the rate cut Wednesday, Bank of Canada governor Tiff Macklem said if inflation continues to ease broadly in line with the bank’s July forecast, it is reasonable to expect further cuts in the policy rate.

Julie Leduc, a mortgage broker at Mortgage Brokers Ottawa, said clients with variable-rate loans were not happy when rates were rising, but the cycle is turning.

“We’ve lived the worst of it, we’re on our way out,” she said.

“So let’s look for the benefits and the benefit is, if they go variable and the rates go down, they’re going to live the benefit.”

Right now, the rates offered to those looking for a new variable-rate mortgage or needing to renew are higher than those being offered for five-year fixed rate mortgages, something that Leduc called an anomaly.

That’s because the expectations are that the Bank of Canada will continue to cut interest rates, lowering the amount charged to borrowers in the future. If something unexpected happens and the central bank doesn’t cut rates, then the rates charged on variable-rate mortgages won’t go down.

But if things continue to roll out as expected, those choosing variable-rate loans will see the amount they are charged go down. Just how much and how quickly will depend on the central bank.

Sojonky says the discounts lenders offer to the prime rate for variable-rate mortgages are also improving.

“Previously in the winter or last fall, we saw discounts to prime as low as 0.15 to 0.3, whereas now we are beginning to enjoy discounts to prime that are approaching one per cent again,” he said.

Leduc says variable-rate mortgages also have the advantage of being less costly to break than their fixed-rate counterparts if you need to get out of one before the term is up.

The penalty for variable-rate loans is typically three months of interest, while a fixed rate closed mortgage penalty is typically the greater of three months of interest or what is called the interest rate differential amount, which is often much greater.

Leduc says none of her clients expect to break their mortgages before the end of their term but in reality, about half of them end up doing so.

This report by The Canadian Press was first published Sept. 5, 2024.

This article was published on Canadian Mortgage Trends.

Despite rising affordability challenges, the majority of young Canadians still view homeownership as a valuable investment, according to a recent Royal LePage survey.

A full 84% of Canadians aged 18 to 34 said homeownership is a worthwhile investment, with even higher percentages in Saskatchewan and Manitoba (94%) and Atlantic Canada (93%).

Of those who don’t currently own a home, 74% said purchasing a home is a priority for them.

“It is not surprising that young buyer hopefuls see immense benefits in home ownership,” said Royal LePage CEO Phil Soper.

However, with high home prices and elevated interest rates, many feel it is increasingly out of reach. Just 54% of those who prioritize homeownership said they believe it’s an achievable goal, with another 26% saying they’re unsure.

“The youngest cohort of homebuyers in Canada have no shortage of barriers on their path to ownership,” Soper added. “Though the cost of borrowing has begun to come down, chronic supply shortages have kept housing prices from dropping, even as demand softened under the weight of high interest rates.”

The survey highlights that 60% of young Canadians who don’t currently own a home plan to purchase one within the next five years. However, financial barriers remain a significant hurdle, with nearly two-thirds citing down payments as the biggest obstacle to homeownership. Despite these challenges, many young Canadians are willing to make sacrifices, such as relocating to more affordable areas or reducing non-essential spending, to achieve their goal of owning a home.

Interestingly, the desire for homeownership among young Canadians is driven by a strong belief in the long-term financial benefits of owning property. Nearly three-quarters of respondents view homeownership as a solid investment, particularly as a means of building wealth over time. This perspective aligns with the broader Canadian belief that real estate is a secure and appreciating asset, even amid market fluctuations.

However, the report also points out the growing frustration among young buyers, many of whom feel priced out of their desired markets. This has led to increased interest in alternative living arrangements, such as co-ownership or purchasing smaller properties. Some young Canadians are also delaying their homebuying plans in hopes that market conditions will eventually improve.

This article was written for Canadian Mortgage Trends by: