Mortgage Discounts Fail to Lure Borrowers Away from Shorter-Terms

CMHC reports slowest growth in residential mortgage debt in over two decades as rate cuts approach. Borrowers remain cautious.

Amidst the current uncertainty surrounding interest rates, Canada's mortgage market has experienced a notable shift in both borrower and lender behaviors. With the anticipation of a potential rate decrease, strategies have been adjusted, resulting in increased discounts on fixed-term mortgages and a surge in demand for shorter-term mortgages. As of February 2024, Canada's residential mortgage debt has reached $2.16 trillion, marking a 3.4% increase from the previous year, the slowest growth rate in nearly 23 years. The Canada Mortgage and Housing Corporation (CMHC) attributes this slowdown to factors such as high inflation and speculation about potential interest rate cuts by the Bank of Canada, leading to a softening of resale activity in the housing market and declining home prices in various regions.

Despite the increasing discounts, many borrowers are hesitant to commit to the traditional five-year mortgage term due to uncertainty surrounding short- to medium-term mortgage rate outlooks. However, the CMHC's Residential Mortgage Industry Report suggests a potential reversal of this trend, with expectations of higher home sales and prices in the coming years driven by declining mortgage rates, robust population growth, and increases in real disposable incomes. Lenders have been quick to adjust, with increasing discounts for fixed-term mortgages indicating a belief in potential rate cuts by the Bank of Canada occurring sooner than previously anticipated.

In July 2023, the Bank of Canada's interest rate settled at five percent, a level that has been maintained for five consecutive announcements. The next interest rate announcement is scheduled for June 5. Additionally, there has been a notable resurgence in demand for variable-rate mortgages, accounting for 15% of all lending for newly-extended mortgages by federally regulated financial institutions in February 2024, a significant increase from record-low levels experienced last summer. Despite these changes, three- to five-year terms remain the preferred option, capturing the majority of the market share.

The Canadian mortgage market is experiencing a period of adjustment and adaptation in response to changing economic conditions and expectations surrounding interest rates. While uncertainty remains a key factor influencing borrower and lender decisions, there are signs of potential growth in home sales and prices in the coming years, driven by various economic factors.