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For one thing, rates have declined significantly compared to the fall. Back then, bond markets were selling off sharply (the benchmark Canadian 5-year yield hit 4.46%, vs. 3.65% today, for example). This yield is tightly linked to 5-year fixed rate mortgages in Canada, making it very important for the country’s housing market.
Meanwhile, variable-rate mortgages are more tied to the Bank of Canada’s overnight policy rate—and they too could decline. There are growing expectations that the central bank will enact rate cuts beginning in the summer. And when rate cut cycles begin, they typically go on for quite some time, so chances are the Bank of Canada will cut rates multiple times over the course of the next 6-12 months.
One bank recently noted that homebuyers seem to be taking the variable-rate route. As the National Post put it:
What Bank of Nova Scotia‘s Farah Omran came up with is that potential homebuyers are trying to take advantage of still-falling home prices, while at the same time choosing variable-rate mortgages on the assumption that the “short-term pain” of higher rates will be worth it for the “long-term” gain of lower rates when the Bank of Canada finally makes its cuts.
Indeed, as it stands, variable rates are higher than fixed rates (by around 1-1.20%). So for prospective home buyers, it’s a question not so much of what the best rate is at the very moment, but what rate will look attractive in say 1-3 years time. Think of it like how Wayne Gretzky approached hockey: He famously said he skated to where the puck is going, not where it is.
According to the Bank of Nova Scotia, originations of variable-rate mortgages fell to 4.6% of total mortgages in July 2023. This was on the back of successive rate hikes by the Bank of Canada, which stung homebuyers who took out low-rate variable mortgages during the pandemic.
However, variable-rate mortgages seem to be making a comeback. The bank notes that as of December 2023, they represent over 20% of new originations, which suggests that Canadians are becoming confident the Bank of Canada will cut rates—and confident in taking on these mortgages that will see interest payments decline if they do.
The First-Time Homebuyers Incentive program is no more. As Canadian Mortgage Trends recounts, the FTHBI, involved “a government contribution of 5% to 10% towards the down payment for first-time homebuyers in exchange for a proportional share in the future increase or decrease in the home’s value”. It was introduced in 2019 and administered by the Canadian Mortgage and Housing Corporation (CMHC).
Unfortunately, the maximum purchase price (just over $500,000 originally, then raised to over $700,000) didn’t exactly work, given where house prices are in major markets. Plus, the federal government announced another program—the First Home Savings Account. And according to data supplied to Canadian Mortgage Trends by CMHC, over 500,000 of these tax-friendly accounts have already been opened by Canadians. Unlike the FTHBI, the FHSA seems like it will be around for a long-time to come.
As a reminder, to be eligible for the FHSA, you must be a Canadian resident over the age of 18, not turn 72 in the year the account was opened and qualify as a first-time home buyer (you or your spouse cannot have owned and lived in a principal residence in the last 5 years.) You can contribute up to $40,000 over 15 years, with $8,000 being the maximum in any given year. Contributions are tax-deductible, and qualified withdrawals are tax-free (for example, to buy a house).
With all these attributes, the FHSA—unlike the FTHBI—looks set to be around for quite some time.
