Good morning,

Variable-rate mortgages appear to be gaining favour again as more Canadians bet that interest rates have peaked, say industry sources.

According to RATESDOTCA data, the percentage of variable-rate quotes rose to 13 per cent in July, a three per cent increase from the month before.

“Some consumers believe interest rates have peaked and are anticipating rates may drop in 2024 or 2025. If that’s the case, taking a variable rate now, riding out the higher rate for the next year until rates begin to drop could prove cost-effective for some,” said Victor Tran, a mortgage expert for the rate comparison site.

It’s a long way from the popularity of these mortgages in the heady days of the pandemic housing market, when home prices soared amid cheap borrowing rates.

In July 2022, 57 per cent of all mortgage quotes were variable-rate, says RATESDOTCA. But as the Bank of Canada raised its interest rate from an historic low of 0.25 per cent to five per cent, a 22-year high, homebuyers flocked to fixed rates.

By December 2022, interest in variable-rate mortgages had dropped to 26 per cent of total quotes and continued falling to a low of 10 per cent in June, 2023.

Now with fixed and variable rates fairly close together, more consumers are giving variable another look, said Tran.

“In some situations, it would only take one 25 basis point decrease for the current average 5-year variable rate at 6.2 per cent to even out with the current average 3-year fixed rate at 6 per cent,” he said.

“When fixed rates and variable rates are so closely aligned, some consumers may choose variable rates, betting that the overnight rate will decline within the length of the mortgage term and they’ll save money in the long run.”

Many economists also think rates may have hit their peak. The Bank of Canada raised its rate in July, but, like the Federal Reserve and European Central Bank, signalled that further moves would depend on data.

RBC economists Claire Fan and Carrie Freestone say rates are already at levels most central banks consider “restrictive” — in other words high enough to slow the economy and inflation.

The impact of higher borrowing costs will continue to apply the brakes to growth and RBC predicts the Bank of Canada will stay on hold as the Canadian economy declines further in the second half of this year.

The labour market is also beginning to show weakness with job growth slipping lower in two of the past three months. With a caution about Canada’s “notoriously volatile” labour market data,  the economists say the 0.5 percentage point increase in the unemployment rate over the past three months is the biggest jump (excluding the pandemic) since early in the 2008/2009 recession.

Inflation remains the wild card, however. Data last week for the United States showed signs inflation was cooling and tomorrow we get Canada’s latest reading on the consumer price index.

In June inflation in Canada slowed to 2.8 per cent, putting it just within the Bank of Canada’s one to three per cent target range for the first time since the spring of 2021.

Economists at RBC expect inflation to tick slightly higher in July’s reading because of rising energy prices, but also expects the Bank of Canada to look beyond this volatility.

Even if rates have peaked, economists are not optimistic of rate cuts anytime soon.

RBC does not expect the Bank of Canada to begin cutting until the third quarter of 2024. It forecasts the rate will fall to 4.5 per cent in that quarter and four per cent in the final quarter of next year.

Cold comfort for Canadians facing mortgage renewal. A survey done for RATESDOTCA and BNN Bloomberg found 62 per cent of homeowners are concerned about higher payments when they renew, a 9 per cent increase from last year.

And for good reason. If they renew this year or next some Canadians could see their mortgage rate double.  A mortgage taken out at three per cent in 2018, would rise to 6.05 per cent if renewed this year, the highest in 16 years, said RATESDOTCA.

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Gas prices are almost back up to the highs of last summer, quite a change considering that a few weeks ago they were 20 per cent lower, points out BMO chief economist Douglas Porter, who brings us today’s chart. In June, gas prices, down 21.6 per cent from the year before, did a lot of the heavy lifting in lowering the overall inflation rate. Porter says now that prices are on the rise, headline inflation could top 3 per cent in July’s data, which comes out tomorrow.

“The BoC [Bank of Canada] was expecting inflation of 3.3 per cent in Q3, so it won’t rattle policy — but it’s a stark reminder that the easy declines in inflation are done,” he said.

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Financial news is full of warnings about the downsides of home bias and the advantages of geographical diversification. However, investing pro Andrew Feindel says catchy headlines and adages obscure the underlying complexities of solving home bias. The reality goes far beyond having a certain percentage of your portfolio in foreign investments and is subject to many contributing factors. Read on to learn more

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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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