Mortgage temperature check 2023: How Canadians are responding to a “new normal” of high interest rates

Amidst decreased inflation and dampening economic activity, the Bank of Canada (BoC) paused rate hikes last week at 5%. While the rate hold offers some relief, many mortgage holders are starting to accept that a high interest rate environment may be the new normal for a while.

We looked at RATEDOTCA mortgage quoter data to see how homeowners are responding to a rapidly evolving market. The data indicates that Canadians continue to prefer fixed rate mortgages over variable, with fixed rate accounting for 85% of total mortgage quotes in September.

Mortgage renewals made up 41% of total quotes in September, an increase of 8% from the same time last year. Apart from an increase in mortgage renewal quotes, there has been a slowdown in purchase and refinancing mortgage activity.

In a high interest rate environment, consumer interest in investment properties has been low, though relatively steady. Investors made up only 10% of total mortgage quotes in September, down from 11% in August.

Canadians prefer fixed rates over variable, but they’re going to see rate hikes too

While Canadians have historically preferred fixed rate mortgages over variable rate mortgages, the lows of 2021 and early 2022 convinced many to switch over. But ten rate hikes down, those who took out variable rate mortgages are likely regretting that decision.

Read more: This is $23,579: This is how much more a variable-rate could have cost homeowners over fixed-rate

These days, more homebuyers are back to opting for fixed rate over variable rate mortgages.

Throughout 2022, quotes for fixed and variable were evenly split, with variable quotes making up 52% of total mortgage quotes in September of last year. The tide turned at the end of the year, as interest payments began piling up for variable rate holders. Since then, the gap between the two has only widened, with seekers of fixed rate mortgages now representing 85% of total mortgage quotes.

Homeowners with fixed rate mortgages, however, are not immune to interest rate hikes either. They should be prepared to see an increase in their mortgage payments when they renew, as fixed rate mortgages follow bond yields.

Moreover, many mortgage holders are opting for shorter-term fixed rate mortgages, as opposed to the more traditional five-year term, according to Amanda Smart, a mortgage agent with Axiom Mortgages. “We’re typically putting people in shorter terms in the hopes that within the next two to three years, rates will start coming down again,” she says.

More people shopping around for mortgage renewals

In a low interest environment, mortgage holders may not bother shopping around for lower rates at renewal, opting rather to stick around with their current lender. Conversely, when interest rates are high, people facing renewals are likely going to search for a lower rate with different lenders.

And we can see this trend reflected in the data. In August and September of 2022, mortgage quotes for renewals comprised 31% and 33% of total mortgage quotes, respectively. This year, they made up for 42% and 41% of total mortgage quotes, indicating an 11% increase in August and 8% increase in September year-on-year.

As we head into 2024, we can likely expect to see even more people shopping around for mortgage renewals, as those who purchased five-year mortgages in 2019 are seeing their terms come up. With higher interest rates still on the horizon, people who can qualify for a new mortgage elsewhere would do better than to stick with their current lender.

Interest in new purchases and refinancing remains low

A high interest rate and low inventory market are making it difficult for people to buy a home. As anticipated, there’s a slowdown in new purchase quotes.

In August and September of last year, new purchase quotes comprised 58% and 56% of total mortgage quotes, respectively. This year, they’ve taken a slight dip, now making up 45% of mortgage quotes in August and 48% in September, marking a 13% and 8% decrease in mortgage purchases.

Quotes for refinances made up 13% and 11% of total mortgage quotes in August and September, respectively. Last year, they were hovering around 10% in August and September of 2022.

Refinancing involves breaking your current mortgage mid-term with another one at a lower rate. And while refinancing was a profitable solution when interest rates were still low — even when factoring in the penalties and fees for refinancing — doing so now could cost mortgage holders a lot more to switch.

Not only are current interest rates likely going to be higher than an existing mortgage, but one would also have to qualify for a higher rate and an additional 2% on the mortgage stress test.

Less demand for primary and investment properties

Suffice to say, fewer people are holding back on picking up new property.

However, Smart states that while the volume of sales is not what it previously has been, she has noticed the occasional buyer for rental properties.

“Particularly out west in Alberta, as well as east in Nova Scotia where home prices are a little cheaper,” she says. In Ontario, she notes a small number of investment purchases in areas that are a little more reasonable and may have more of market for rentals, like in Hamilton and Brantford.

And despite the demand for housing having come down since the interest rate environment of two years ago, Smart has also noted some interest from first-time homebuyers and people looking to downsize.

In 2022, primary properties accounted for 90% of total mortgage quotes in both August and September. This year, they’re down to 87% in August and 89% in September, highlighting a slight year-on-year decrease of 3% in August and 1% in September.

While total quotes are lower from 2022 to 2023, the percentage of investment quotes has increased. Investment properties accounted for 8% of total mortgage quotes in both August and September 2022. This year, they’re at 11% and 10%, indicating a year-on-year increase of 3% in August and 2% in September.

How Canadians are responding to rapidly changing conditions

The market is rough and the future unpredictable. Canadian homeowners are rolling with the punches as best as they can. Here are a few of their choices, given the current challenges they’re facing:

Alternative lenders

As it becomes increasingly difficult to qualify for mortgages with banks, some are choosing to go with private or alternative lenders to get a mortgage. While interest rates are higher with private lenders, many homebuyers are considering it an interim solution until rates come down.

Extending their amortization period

Many homeowners are opting to lower their monthly payments by extending their loan terms, known as negative amortizations. In fact, Equitable Bank recently announced that it will now be offering extended amortization periods of up to 40 years.

While some homeowners will find temporary relief in lower payments, there are two considerable risks associated with extending the amortization period. For one, homeowners will not only be paying more interest over the term, and it will also take longer for them to pay off their debt.

Mortgages that run into negative amortizations account for $130 billion in housing debt, and Canada’s federal banking regulator now requires lending institutions to hold more capital for such mortgages.

Be aware and prepared for continued uncertainty

Smart anticipates that there will be many more uncertainties over the next two years, and one of the best things that homeowners can do is to get informed of their options. “You can hold a rate for up to 120 days prior to your renewal date, so it helps to educate yourself and see what’s out there,” she says.

“Talking to a mortgage agent and having all of your information handy can take a lot of stress and anxiety out of the purchase, refinance, or renewal process,” she adds. Another thing customers can do is get approved as quickly as possible before a chance that rates do go up.

While the BoC has paused rate hikes, remember its hawkish stance – the central bank hasn’t ruled out the possibility of another rate hike before the year ends.

The BoC’s next policy rate announcement is on December 6.