Popularity of Short-Term Mortgages on the Rise in Canada: Report

For sale in front of west-end Toronto homes April 9, 2017. The Canadian Press/Graeme Roy

Short-term, fixed-rate mortgages are gaining popularity among Canadian homebuyers, partly due to expectations that interest rates will fall in the coming years, a report from the Canada Mortgage and Housing Corporation suggests.

Homebuyers are increasingly choosing fixed-rate, shorter-term mortgages instead of the standard five-year agreements, according to the report. The trend has been growing since 2023, and has surged since the beginning of this year.

“With borrowers expecting interest rates to fall in the coming years, there is less incentive to lock in for the full five-year term,” reads the report.

In July, fixed-rate mortgages with terms of three to under five years were the most popular choice in Canada, making up more than half of renewed mortgages. By contrast, only 12 percent of renewals were for fixed-rate mortgages with terms of five years or longer.

The  second-most-popular option was fixed-rate mortgages with terms of one to under three years, accounting for 16 percent of renewals.

Variable-rate mortgages, meanwhile, represented just 9 percent of renewed mortgages in July. The agency noted in its fall 2023 report that variable-rate mortgages had declined in recent years, partly because of homebuyers’ concerns about possible sudden rises in interest rates.

The decline in the popularity of variable-rate mortgages began around the same time the Bank of Canada started raising interest rates in March 2022.

Slow Mortgage Debt Growth

The agency also found that residential mortgage debt growth in Canada has continued to slow as homebuyers have delayed purchases for much of the year. The authors said this is likely due to high borrowing costs, high housing prices, and expectations that the Bank of Canada will cut interest rates further in the short term.

“Mortgage debt growth remained below average and shorter mortgage terms stayed popular through the first half of the year as homebuyers and those renewing mortgages anticipated lower interest rates,” said Tania Bourassa-Ochoa, CMHC deputy chief economist, in a Nov. 4 press release.

“The Bank of Canada’s consecutive rate cuts since June, including a 50-basis point cut in October, may spark an uptick in mortgage activity through the rest of 2024 and into 2025.”

Roughly 1.2 million fixed-rate mortgages are set to renew next year. More than 80 percent of these mortgages were established before March 2022, according to the agency, when the Bank of Canada’s interest rate was 1 percent or lower.

“These renewals at higher interest rates and already high household debt levels are being closely monitored by the financial industry and policymakers,” the agency said.