Fearing higher rates, more Canadians may be refinancing their mortgage

While the Bank of Canada (BoC) held its policy interest rate in March and April, its recent hike of 25 basis points to an overnight rate of 4.75% has homeowners facing a 22-year-high cost of borrowing. It’s no surprise Canadians are increasingly considering refinancing their mortgage in 2023 compared to last year’s RATESDOTCA mortgage report, which showed a declining interest in refinancing. While there’s no chance anyone would choose to do this to access today’s interest rates, debt consolidation has emerged as a likely explanation.

According to recent Angus Reid Institute data, the percentage of mortgage holders that are having trouble managing their payments has increased 11 points since 2022, from 34% to 45% — close to half. And the portion of Canadians who say credit card and loan debt is a significant source of stress is higher among mortgage holders (30%) compared to those without mortgages (26%).

Using RATESDOTCA mortgage quoter data, we got a current read on how mortgage activity has changed from 2022 so far in 2023. Search interest in mortgage refinance and renewal quotes has steadily increased year-over-year (YoY) since January, while total, variable rate, and primary property quotes have declined annually. While the general mortgage market is picking up month-over-month, the biggest shift in mortgage activity this year is how Canadians are reworking their mortgages to stay afloat.

Mortgage refinance and renewal quotes are up YoY

From May 2022 to 2023, the number of people quoting for mortgage refinances and renewals rose, while those seeking purchase quotes decreased.

Below is the breakdown of YoY quote activity so far in 2023:

• Refinancing quotes (+17%)
• Renewal quotes (+6%)
• Purchase quotes (-25%)

The distribution of mortgage quotes may not come as much of a surprise to anyone following the market.

Despite improvements from the start of the year, the housing market in many provinces is still slow compared to a year prior, hence the drop in purchase quotes.

Meanwhile, those approaching their renewal date are facing significantly higher rates, which presents a prime opportunity to compare mortgage renewal rates and find a lower rate for their next term.

Homeowners that are in debt may be looking at refinancing to consolidate debt that’s accumulated from inflated pricing over the past year. For example, from Q1 2022 to Q1 2023, missed payments on non-mortgage-related debt increased close to 20%, with total debt increasing near 5% from last year.

“Many homeowners will have outstanding debt, whether it be on HELOCs, LOCs, credit cards, or loans,” says Victor Tran, RATESDOTCA mortgage expert. “Rising interest rates will push up the amount of interest they have to pay to service the debt, and it can be more affordable to refinance a mortgage and roll all of the debt into one payment instead of several.”

Plus, in April and May, bond yields fell temporarily, which lowered five-year fixed rates as low as 4.29%. This momentary drop may have inspired some mortgage holders to consider refinancing right before the surge of quotes in May.

But searching for quotes is one thing. Actually going through with a refinance means seriously considering whether you can afford to do so at a higher rate.

“Tens of thousands of homeowners desperately need to refinance but can't qualify with a prime lender, don't like the interest rate, or can't access enough equity,” says mortgage strategist, Rob McLister. “But they're still searching for solutions.”

That could be why the actual number of refinances in Canada are down 32% YoY, based on recent data from the Canada Mortgage and Housing Corporation (CMHC). However, McLister caveats, this data isn’t inclusive of all mortgage lenders in Canada, so it may not fully reflect the industry as a whole.

It’s best to discuss refinancing with a broker and see what makes the most sense for the amount of mortgage you have left and the amount of debt you have.

If you’re considering making a move on your mortgage — any move at all — it’s best practice to compare rates when refinancing, renewing, or purchasing.

Total mortgage quotes fell YoY in May

After rising from January to April, the amount of total mortgage quotes dropped in May, year over year. A recent BMO poll suggests prospective homebuyers, by and large, are waiting for interest rates to come down before making a purchase, which could explain the drop in total quotes.

Below is the YoY search activity from the RATESDOTCA mortgage quoter so far in 2023:

• Total mortgage quotes (-9%)

While May is usually the most popular time of year for real estate activity, “interest is higher, and inventory is very, very tight, which is in turn pushing up home prices,” says Tran. “Potential homebuyers may be priced out of the market, or they might be waiting until the BoC begins to cut rates before looking for a home.”

However, on a month over month basis, total mortgage quotes increased in January 2023 from the last three months of 2022 and have remained above that of Q4 of 2022. This signals a climb in quote activity that could soon reach last year’s level.

Steep drop in variable rate quotes from last year’s peak

Variable rate mortgage quotes peaked in September 2022, marking a -82% decline in variable rate quotes compared to our latest May data. May 2022 to May 2023 highlights a similar, sharp decrease. Meanwhile, fixed-rate quotes are up substantially YoY, making fixed rate mortgages the more popular interest rate choice.

Below is the breakdown of YoY quote activity so far in 2023:

• Fixed rate quotes (+67%)
• Variable rate quotes (-80%)

With eight consecutive BoC rate hikes, two pauses, and yet another recent increase, variable rates make mortgage holders more financially vulnerable than those with fixed rate mortgages.

According to Tran, Canadians have traditionally preferred fixed rate mortgages to variable rate mortgages. However, the trend changed during the pandemic.

“When the BoC cut interest rates in order to stimulate the economy, variable rates were extraordinarily low, which allowed many people to purchase homes for prices they could not have otherwise afforded.” says Tran.

“Now, as interest rates rise, variable rates are no longer as attractive, and fixed rates provide more stability in an unstable environment, so the preference is once again returning to fixed rates.”

Primary and investment property quotes are down YoY

Mortgage quotes for primary properties are down significantly year over year, while investment property quotes follow close behind.

Below is the breakdown of YoY quote activity so far in 2023:

• Primary (-26%)
• Investment (-7%)

A drop in primary quotes could simply reflect the lack of inventory available on the market. But, according to a recent RBC Special Housing Report, more sellers started listing their homes in May, which will help stimulate the market.

As for the decrease in investment property quotes, many of those who invest in property haven’t been getting the return they’d hoped for over the past year. In most cases, rental income from tenants amounts to less than what it costs to cover total mortgage payments, condo fees, and property taxes. While most investors assume they’ll have to pay for a portion of the mortgage out of pocket, the first quarter of 2023 had some investors losing roughly $1,000 a month. Those who bought in the past couple years with a variable rate are being hit hardest.

With the Bank’s second rate hike of the year, this pattern may continue, as the cost of owning property remains higher than most can afford.

Mortgage activity for the next two quarters will highly depend on Canadians’ ability to adjust to prolonged high consumer prices and interest rates, along with housing inventory levels.