With an expectation that interest rates will fall in the coming years, nearly one in four new homebuyers and those renewing are choosing fixed-rate mortgages with terms under three years.
As of January, 36% of new mortgage originations had fixed-rate terms of three years or less while 28% had fixed-rate terms of between three and five years, according to new data released by the Canada Mortgage and Housing Corporation (CMHC).
“Borrowers’ expectations that the policy interest rate will decrease from its 15-year high in the next few years, coupled with minimal rate differences between the different agreement lengths, are driving factors behind this shift,” CMHC noted in its Spring 2023 Residential Mortgage Industry report.
On the other hand, longer-term fixed-rate mortgages of five years or longer–traditionally the preferred mortgage product by Canadian borrowers—comprised just 13% of new originations. That’s down from nearly 50% just prior to the pandemic.
Variable-rate mortgages accounted for 16.7% of new originations as of January, down from a peak of nearly 57% reached two years ago when most variable rates were available for less than fixed-rate products.
Despite slowing mortgage growth, household debt continues to rise
Despite mortgage growth in Canada falling back to the single digits, household debt in Canada is continuing to reach “record” levels, CMHC said.
As of January, total residential mortgage debt in Canada was $2.08 trillion, up 6% from a year earlier. The rate of annual growth was nearly double that in late 2021 and early 2022.
“Inflation, rapidly rising interest rates, and cooling housing markets across the country weakened consumer confidence in 2022, resulting in fewer consumers looking to purchase a property and, consequently, decelerating mortgage growth in Canada,” CMHC noted.
Despite the slowdown in mortgage growth, the report notes that the debt-to-income ratio in Canada has increased to 180.7%.
Other highlights from CMHC’s report
The following are among some of the other key findings in CMHC’s report:
- Refinances were down 32% in 2022 due to the increase in interest costs.
- Mortgage delinquency rates remained at a historical low of 0.14% as of Q4 2022.
- Credit card delinquencies, however, rose to 1.36% in Q4 from 1.29% in Q3, while auto delinquencies rose to 2.02% from 1.97%.
- About 60% of new mortgages had an amortization over 25 years as of the fourth quarter of 2022.
- That’s up from 57% a year earlier and 51% in Q4 2020.
- The share of uninsured new mortgages with a total debt-service (TDS) ratio above 50% at chartered banks was 16.6% as of Q4 2022.
- That’s up from 14.6% in the previous quarter and 13.6% in Q4 2021.
- The share of newly originated uninsured mortgages with a loan-to-value of 65% or less rose to 39.8% in 2022.
- That’s up from 38.2% in 2021 and 37.1% in 2020.
