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Homebuyers in Canada bet on more rate cuts with adjustable loans

Canadian homebuyers are increasingly turning to variable-rate mortgages, betting that the Bank of Canada will continue to cut borrowing costs. New data from the central bank shows that 12.9 percent of borrowers opted for mortgages that follow the Bank of Canada's benchmark rate in the first quarter, marking the second consecutive increase. This is a significant rise from the 4.2 percent seen in the third quarter of 2023, although it still falls short of the pandemic period when floating-rate loans dominated the market.

This shift in borrower preference began even before the Bank of Canada cut its policy interest rate earlier this month and hinted at more reductions in the future. The benchmark rate is now at 4.75 percent, and economists predict it could drop to three percent by the end of 2025, according to a Bloomberg survey. This would translate to a commercial bank prime lending rate of around 5.2 percent. For those with good credit, variable mortgage rates typically sit just below the prime rate.

“There’s a broad consensus out there the Bank of Canada will cut rates, but there might not be as much of a consensus on how much and how quickly,” said Robert Hogue, an economist with the Royal Bank of Canada in Toronto. He noted that homebuyers are opting for variable-rate loans now because they anticipate paying less over the longer term, despite higher initial costs.

The housing market in Canada has cooled in recent months due to the highest interest rates in decades, which deterred many potential buyers. However, the rising interest in variable-rate mortgages suggests a possible shift in sentiment, indicating that the rate shock may be subsiding. The Bank of Canada’s rate cut on June 5 has spurred increased inquiries about variable-rate mortgages, even though these rates are currently higher than fixed ones.

Shawn Stillman, principal broker at Mortgage Outlet in Toronto, said, “I would say it’s a conversation I have with pretty much everybody.” He added that when he explains and shows charts predicting a rate fall of one percent over the next year, many clients become very interested. This growing curiosity and confidence in rate cuts highlight a potential turning point in the Canadian housing market.

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