The popularity of variable-rate mortgages is continuing to fall and is now nearly at levels last seen prior to the pandemic in early 2020.

As of April, just 8% of new originations had a variable rate compared to 92% for fixed-rate mortgages, data from Statistics Canada reveals. For variable-rate mortgages that’s down from a peak of nearly 57% reached in January 2022 when certain variable-rate mortgages could be secured for an historic low of 0.99%.

After 450 basis points worth of rate hikes by the Bank of Canada, variable rates are now averaging between 5.50% and 6%.

There are also new trends developing among those who are choosing fixed-rate mortgages, with most new borrowers opting for shorter terms. However, 1- and 2-year terms, which accounted for 42% of new originations at the start of the year, are now being passed over for 3- and 4-year terms, the figures show.

As of April, 39% of new mortgages had a term of under 3 years, compared to nearly 41% that had a term of three or four years.

Five-year fixed mortgages, which have historically been the preferred term for mortgage borrowers in Canada, now account for just 12% of originations.

OSFI urges lenders to address amortization extension risks

Canada’s banking regulator says lenders need to address the risks stemming from amortization extensions at the “earliest opportunity.”

The Office of the Superintendent of Financial Institutions’ (OSFI) made the comments in an exclusive interview with Reuters last week. The concern comes as variable-rate mortgage holders with fixed payments have seen their amortization periods lengthen, in some cases substantially, due to the 450 basis points of rate hikes that have been delivered over the past year by the Bank of Canada.

For example, nearly a third of BMO’s variable-rate mortgage portfolio now has an amortization over 30 years. For TD and CIBC, over a quarter of their variable-rate portfolio has an amortization over 35 years. In most cases, the mortgage contracts will revert to the original amortization schedule at the next term renewal, which will generally translate into higher payments.

“OSFI expects a more prudent and active account management approach, including resolving negative amortization at the earliest opportunity as well as recognizing the higher risk of these loans in loss provisioning,” the regulator said in a statement to Reuters.

“Our ongoing conversations with financial institutions have highlighted the importance of being proactive in managing all types of mortgage accounts, and to act before levels of borrower stress become unmanageable.”

In April, OSFI called out the housing market as one of the most significant economic risks for 2023.

And while temporarily extending amortization periods has been a saving grace for many variable-rate mortgage holders as a way to manage the impact of higher borrowing costs, OSFI assistant superintendent Tolga Yalkin said in April the strategy is “not without risk,” since it “keep[s] borrowers in debt longer and lead[s] to higher interest payments.”

Teranet-National Bank HPI posts first increase in 11 months

After 10 consecutive monthly declines, the Teranet-National Bank Composite Home Price Index resumed its upward trend.

The index rose 0.6% in May compared to April in seasonally adjusted terms, but remains down 8.1% year-over-year.

Eight of the 11 housing markets in the composite index rose in the month, led by Toronto (+1.6%), Winnipeg (+1.5%), Victoria (+1.3%) and Edmonton (+1.3%).

On an annual basis, gains in Calgary (+8.3%), Edmonton (+4.9%) and Quebec City (+3.1%) were more than offset by declines in Hamilton (-16.8%), Toronto (-10.3%) and Ottawa-Gatineau (-9.5%).

“This turnaround in property prices is due in particular to the rebound in the resale market over the past four months,” National Bank economist Daren King noted. “This recovery is taking place against a backdrop of record demographic growth, which is accentuating the shortage of housing supply on the market.”

The report notes that the Bank of Canada’s resumption of monetary policy tightening and an expected economic slowdown should moderate house price growth later this year.