Are you considering a variable-rate mortgage for your new home in Kingston? Unlike fixed-rate mortgages, your interest rates and payments will change during your mortgage term, and it has its benefits. But before opting for a variable-rate mortgage, learn about its current trends and market scenario to make smarter decisions.
What is a Variable Rate Mortgage?
A variable-rate mortgage is a home loan in which the rate of interest is not fixed. In other words, the interest payment amounts will get adjusted at a certain level above the set reference rate or benchmark. For example, a variable rate mortgage may look like this: Prime rate + 2 points.
Lenders can provide borrowers with varying interest rates over a mortgage loan’s lifetime. Besides, they can render a hybrid adjustable-rate mortgage (ARM), meaning it would include both an initial fixed interest term followed by a variable rate that may be reset periodically after the fixed period is over.
The Scenario of Variable Rate Mortgage Post-Pandemic
The popularity of variable-rate mortgages is witnessing a downfall, and currently, they are almost close to the levels seen during the pre-pandemic period in early 2020. A Statistics Canada reports have shown that 92% of the cases are fixed-rate mortgages, while only a handful of 8% of the new mortgage applications are of a variable-rate type.
It is a significant reduction from its peak of around 57%, as witnessed in January 2022. Additionally, during this period, some variable-rate mortgages were found for as low as 0.99%, which is a never-before incident in mortgaging history.
After the Bank of Canada made some rate hikes worth 450 basis points, the variable rates are reported to have an average range between 5.50% and 6%. Furthermore, new trends have been developing among borrowers opting for fixed-rate mortgages. Analysts have observed the growing trend among new borrowers to opt for shorter terms.
However, according to the figures, the 1-year and 2-year terms, which had earlier accounted for 42% of new mortgage applications at the beginning of 2023, are currently being passed over for longer terms of 3-4 years.
During the pre-pandemic period, mortgage rates were around 41%, with a 3-4 years repayment term. However, currently, as of April 2023, 39% of new mortgage originations had a term of below three years. Moreover, 5-year fixed mortgages, which have been the preferred term for Canadian mortgage borrowers for many years, now account for a low 12% of all new originations.
Lenders Should Consider Amortization Extension Risks
As Canada’s banking regulator suggests, it’s high time for lenders to address amortization extension risks at the earliest. The OSFI (Office of the Superintendent of Financial Institutions) is concerned about variable-rate mortgage holders with fixed payments who have witnessed the lengthening of their amortization periods.
In many cases, amortization extension comes from the 450 basis points of the rate increases that the Bank of Canada offered over the past year. For instance, around one-third of BMO’s (Bank of Montreal) variable-rate mortgage portfolio currently has an amortization period of 30+ years.
On the other hand, for CIBC and TD, more than a quarter of their portfolio has over 35 years of amortization. In a majority of cases, the mortgage contracts will return to the original amortization period during the next term renewal. And when this happens, usually this gets converted into higher repayments. So, lenders must take action immediately before the upcoming renewal date.
With constantly increasing interest rates and tricky terms and conditions, it has become more important than ever to work with an experienced mortgage agent. A trusted agent will create a plan that works the best for you and supports your financial growth.