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Amid ongoing uncertainty over the direction of interest rates, Canada’s mortgage market has seen a significant shift in borrower and lender behaviours. Anticipating a potential rate decline, both parties have adjusted their strategies, leading to increased discounts on fixed-term mortgages and a surge in demand for shorter-term mortgages.

“Persisting high inflation and uncertainty around the potential decrease in the Bank of Canada’s interest rate had cooling effects across the country in 2023,” the Canada Mortgage and Housing Corporation (CMHC) said in its Residential Mortgage Industry Report released Wednesday.

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Canada’s residential mortgage debt reached $2.16 trillion in February 2024 — an increase of 3.4 per cent from the previous year, and the slowest growth rate in nearly 23 years.

The CMHC attributes the slowdown in mortgage growth to several factors, including high inflation and speculation about potential interest rate cuts by the Bank of Canada. As a result, there has been a softening of resale activity in the housing market and declining home prices in various regions.

“Despite the increasing discount, most borrowers remain unwilling to lock in for the traditional five-year mortgage term as they remain uncertain of the short- to medium-term mortgage rate outlook,” CMHC said in the report.

However, the report suggests a potential reversal of this trend, with expectations of higher home sales and prices in the coming years. The anticipated growth is driven by declining mortgage rates, robust population growth, and increases in real disposable incomes.

“Increasing discounts for fixed-term mortgages in the first two months of this year indicate lenders foreseeing potential rate cuts by the Bank of Canada occurring sooner than they anticipated last year,” the agency said.

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In July 2023, the Bank of Canada’s interest rate settled at five per cent, a level it has maintained for five consecutive announcements. The next interest rate announcement is scheduled for June 5.

Meanwhile, CMHC reports a notable resurgence in demand for variable-rate mortgages. They accounted for 15 per cent of all lending for newly-extended mortgages by federally regulated financial institutions in February 2024, a stark increase from the record-low levels experienced last summer.

Despite the changing landscape, three- to five-year terms remained the preferred option, capturing the lion’s share of the market. “They accounted for nearly 40 per cent ($9.0B out of $23.0) of all newly-extended mortgage lending by federally regulated institutions in February 2024,” the CMHC said.

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