As mortgage interest rates rise, interest in mortgages is on the decline while interest in variable rates remains strong..According to RATESDOTCA, month-over-month quotes for mortgage purchases, renewals and refinances dropped 11% since the Bank of Canada’s rate increase in July..“Our data shows buyer interest slowed considerably in most of the country as would-be buyers take a step back and wait to see how things develop,” says John Shmuel, managing editor of RATESDOTCA. “Historically, Canadians have preferred the stability of a five-year fixed rate, however in 2021 we saw that shift to variable rates as rates plummeted.”.“Today interest in variable rates remains strong even as rates are rising quickly. This could point to affordability issues or to homebuyers preferring the flexibility of a variable rate as the rate environment continues to fluctuate.”.Mortgages have become more expensive over the last five months of the Bank of Canada’s assault on inflation with several larger increases in its overnight prime rate..The severity of July’s rate increase came as a surprise to many Canadians, many of whom were expecting a 75-basis-point hike..It turned out to be a full percentage-point increase, with the potential to increase monthly payments by $53 for every $100,000 of a variable rate mortgage..The rapid rise in rates has sidelined many potential buyers, says Dan Eisner, CEO of True North Mortgage..“We’ve seen a lot of buyers waiting for sellers,” says Eisner. “Until sellers recognize home prices have fallen to some amount, we’re not going to see the same number of transactions until maybe later this year, into next year. Sellers will eventually have to lower their price if they wish to sell.”.Lower prices mean lower down payment amounts..“The national average down payment dropped 17% from April to July,” says Shmuel. “Despite small fluctuations in that time period, any month-over-month increases are getting smaller, 21% in February versus 7% in April and 2% in July.”.“In Ontario specifically, the average down payment amount decreased by 1% in July, to $205,856, and in B.C., it dropped by 13%, to $214,263. This trend could largely be due to falling home prices across Canada..According to the Canadian Real Estate Association, the national average sale price declined 5% year-over-year in July. Therefore, smaller down payments may reflect smaller mortgage principals.”.Eisner says if a buyer is eyeing a $1.2 million home, and that price is reduced to $999,000, the buyer has the option to just get by with 10% down..“This could explain the dip in down payment amounts in both Ontario and BC, where uninsurable mortgages, or homes worth more than $1 million that require a 20% down payment, are dominant,” he says. "However, the high cost of living could be another factor causing Canadians to put down only what they need to.”.“Clients could be thinking ‘I'm going to put less down because I want a buffer to make mortgage payments. But that seems less likely, since as mortgage rates rise, you could be more inclined to put more down in order to do away with the interest.”.Though variable mortgage rates are currently still cheaper than fixed rates, data from the Bank of Canada shows Canadians are returning to fixed rates to prevent mortgage payments from increasing further every few months..In May, fixed-rate mortgages made up 49% of all home loans in May, while RATESDOTCA data show that across Canada in July variable mortgage quotes comprised 59.1% of all quotes, compared to 40.9% for fixed rate quotes..Five-year variable rate mortgages are experiencing quicker month-over-month growth than five-year fixed rates..The average variable interest rate quoted in May was 2.28%, 2.72% in June, and 3.19% in July, while the average fixed interest rate quoted in May was 3.98%, 4.32% in June, and 4.8% in July..“Normally it is predominantly fixed compared to variable,” says Eisner, of Canadians’ mortgage rate preference. “For the last few months, it’s been strongly variable versus fixed, with the qualifying rate being lower for variable, but as prime goes up, that qualifying rate goes up.”.The bank’s next rate announcement is Sept. 7, with market watchers playing a guessing game on how large the rate hike will be. Speculation includes .5% or .75%, with some suggesting another outsized 1% increase, taking the rate to 3.5% and then make no more moves this year, while keeping a close eye on inflation..According to Eisner, housing prices may reach their lowest point by the end of Q1 in 2023, so if you’re looking to buy, there is still an opportunity to save on the principal portion of your mortgage..“I imagine there are sellers out there who eventually will say look, I just have to sell at this point,” says Eisner. “And market peak is usually around that time.”
