Today, LowestRates.ca, an online rate comparison platform for auto insurance and mortgages, released a report showing that the number of Canadians who applied for a fixed-rate mortgage in January and February saw a substantial spike. Of LowestRates.ca users applying for a mortgage, 64.4% in January and 54.6% in February opted for a fixed-rate mortgage over a variable-rate, increases of 20 percentage points and 10 percentage points, respectively. The spike comes after the Bank of Canada increased their interest rate to 1.25% on January 14 of this year.
In the past, trends have shown that the majority of users on LowestRates.ca, who process tens of thousands of mortgage quotes annually, have gone with a variable-rate mortgage. However, since July 2017, when the Bank of Canadaannounced a 25 basis point hike, the number of consumers locking in a fixed-rate mortgage has been consistently increasing.
“The key for Canadians is not to panic. For the past 30 years, mortgage rates have been trending downward,” said Justin Thouin, Co-founder and CEO of LowestRates.ca. “There have been brief periods of increase over that time, like we’re in right now, but a mortgage is a long-term investment and the long-term data tells us that a variable-rate mortgage is the best option.”
Historically, the majority of Canadians who shop for mortgage rates on LowestRates.ca opt for variable-rate mortgages. Since January 2014, an average of 56.56% of users have gone variable, compared with 43.44% who chose a fixed-rate mortgage. The increase in fixed-rate mortgages locked in by Canadian consumers is seen by LowestRates.ca as a response to rate hikes, and fear of higher rates in the future.
Understanding The Impact of Rate Hikes
If a consumer purchases a home for $750,000 (with a down payment of 10 per cent amortized over 25 years), at a five-year, variable rate of 2.20%, they would have a total monthly mortgage interest payment of $3,025. If the Bank of Canada increases its overnight rate by 25 basis points, that homeowner’s monthly interest payment on their mortgage would be $3,111 — an increase of $86 per month.
That same homeowner using a fixed mortgage rate — the most competitive fixed product on LowestRates.ca last month was 3.03% — would have a total mortgage payment of $3,315. While they can lock in that rate for five years, they’re still spending $290 a month more in interest when compared to the variable product, even after variable rates go up. A total of $3,480 a year in increased costs.
LowestRates.ca is an online rate comparison site for insurance, mortgages, loans and credit card rates in Canada. The free, independent service connects directly with financial institutions and providers from all over North America to provide Canadians with a comprehensive list of rates. LowestRates.ca wants to help everyone become more financially literate, with a goal of saving Canadians $1 billion in interest and fees.