Despite higher rates, a healthy slice of our population is staying open minded to variable mortgage rates.
A CIBC poll today finds that:
- 72% of Canadians expect rising interest rates over the next 12 months (26% think they’ll stay the same)
- An overwhelming 83% of Canadians favour “predictability and stability over risk” when it comes to their finances (unsurprisingly)
- 77% of current mortgagors already have a fixed mortgage rate.
Yet, just half (54%) of homeowners or prospective homeowners say they’d take a fixed-rate mortgage if they had to choose today.1
The more rates increase, the more we could see informed borrowers choosing variable rates. Variable-rate advantages only improve the higher rates go.
The fact that variable rates are maintaining consumer mindshare in a rising rate environment is not surprising. Consider that:
- The wider the gap between fixed and variable, the more costly the “insurance” of a fixed rate, and the lower the demand
- That gap has recently grown to its current level of 75-88 bps (the actual level varies by loan-to-value, whether the mortgage can be insured and lender competitiveness)
- The appeal of variables tends to increase more rapidly when the gap exceeds 100+ bps
- With higher debt loads, some consumers are drawn to the upfront cashflow advantage of a variable rate
- Rising home prices create bigger equity buffers, giving some borrowers the confidence to assume more risk with a variable rate
- Many floating-rate mortgages have fixed payments, reducing their perceived risk
- Some folks are simply more prone to variables, regardless of the rate environment. Past studies have suggested that one-third of variable-rate mortgagors always choose floating rates
- There’s anecdotal evidence that mortgage advisors have increasingly been recommending variable rates given the wide spreads from fixed rates and given their shrinking ability to compete with the lowest uninsured 5-year fixed rates
- Due to the latest government stress test, there is no longer a qualification advantage for choosing a 5-year fixed rate over a variable
- Variables have received an inordinate amount of media attention this year, boosting their demand somewhat.
The takeaway is that variable-rate market share will likely continue holding its own, despite further Bank of Canada rate hikes. And barring a drastic upside inflation surprise (which would not be variable-rate friendly), that’s a good thing.
1The rest: 19% would choose a variable-rate mortgage and 26% are undecided.