Canadian real estate owners are seeking the security (& discount) of fixed rate mortgages. Bank of Canada (BoC) data shows the share of new mortgage loans with variable interest continued to shrink in February. Just one year ago, the majority of new loans were attached to variable rate mortgages. Now the share is back to pre-pandemic levels, as fast rising interest rates spook the market.
Canadian Variable Interest Mortgage Loans Down 87%
Canadians aren’t interested in mortgage debt with variable interest rates right now. Variable rate loans contracted by 31% in February, representing just $2.38 billion in new loans. This represents a decline of 87% when compared to the same month last year. It was the lowest volume for the segment since February 2020—before the low rate credit frenzy began.
Variable Rate Mortgages Went From The Majority of Loans To Just A Tiny Fraction
Mortgage borrowing is pulling back in general, but not as fast as variable rate loans. The segment saw its market share contract 6 points to 11% of new mortgages in February. Most (55%) new loans this time last year had variable interest, a month prior to the BoC rate hikes. The most recent numbers represent the smallest share of lending since February 2020.
Canadian Variable Rate Mortgages Fall To Lowest Market Share Since Pre-Pandemic
The share of total new mortgage credit issued with variable interest costs.
Source: Bank of Canada; Better Dwelling.
Falling back to pre-pandemic levels is far from a coincidence. Prior to March 2020, interest rates were climbing—albeit at a much slower pace than we’ve seen. Borrowers back then locked in protection against even higher interest rates. Payment predictability is an attractive feature with the media filled with stories of people being caught off guard.
The current market also has the added risk of falling fixed rates and moral hazard. While variable interest mortgages haven’t seen rates budge, fixed rate products have fallen. Falling rates at this level, well above the stress test floor, also adds additional leverage. Real estate investors are likely looking for more leverage, after seeing minimal risk and loosening market conditions after just a few months of price drops.