Canadian homebuyers are increasingly opting for variable-rate mortgages as expectations build that policymakers are about to provide further relief on borrowing costs.

The share of borrowers opting for mortgages that track the Bank of Canada’s benchmark rate rose to 12.9 per cent in the first quarter, the second consecutive increase, according to new data from the central bank. That’s up from a low of just 4.2 per cent of new mortgages in the third quarter of 2023 — though it’s still well below the levels seen in the pandemic, when such floating-rate loans briefly became the majority of the market. 

The change in borrower preferences began even before the central bank cut its policy interest rate earlier this month and signaled more cuts to come. 

With the benchmark rate now at 4.75 per cent, economists say that slowing economic growth and cooling inflation will prompt officials to cut it all the way to three per cent by the end of 2025, according to a Bloomberg survey. That would imply commercial bank prime lending rate of 5.2 per cent. Variable mortgage rates for bank customers with good credit are usually a little bit 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 Royal Bank of Canada in Toronto. Homebuyers are willing to go with variable-rate loans now, “because even though I’m going to pay more for the first six months, the rest of the four-year term I’m going to pay less,” he said.

Canada’s housing market has slowed and prices have dipped in recent months as the highest interest rates in decades deterred buyers from bidding for properties. But the growing interest in variable-rate mortgages may be an early sign that sentiment is starting to shift, and that rate shock is wearing off.

The Bank of Canada’s rate cut on June 5 prompted many to ask about variable-rate mortgages, even though their rates are currently higher than fixed ones, said Shawn Stillman, principal broker at Mortgage Outlet in Toronto. 

“I would say it’s a conversation I have with pretty much everybody,” he said. “Once I explain and show a chart that we expect rates to fall by one per cent over the next 12 months, a lot of people are very interested in it.”