Amid the prospect of rising interest rates, Canadians are increasingly choosing fixed-rate mortgages, and are opting for shorter amortization periods in order to save on interest costs in the long run.
Two studies released on Wednesday show that homeowners and prospective homebuyers are taking steps to minimize the amount of interest they’ll pay over the life of their mortgage.
The 19th Annual RBC Homeownership Poll found that 42% of prospective homebuyers in Canada plan to choose a fixed-rate mortgage, compared to just 21% who intend to take out a variable-rate mortgage.
While variable rate mortgages gained popularity in recent years, fixed rate mortgages are regaining some ground in the market.
“The popularity of fixed-rate mortgages had been declining over the past few years, but the trend is shifting. Canadians are now looking to lock in at historically low interest rates,” said Claude DeMone, director of strategy for home-equity financing at RBC. “What you’re currently seeing is a small margin of difference between fixed and variable interest rate offers, so many Canadians are opting for the peace of mind that comes with a fixed rate.”
While mortgage holders are very aware that interest rate hikes are coming, more than half of mortgage holders do not expect rate increases to cause them financial difficulty. Six-in-10 say they are taking advantage of low interest rates to pay down more principal on their mortgages.
Many Canadians are also giving consideration to shorter amortization periods as a strategy for saving on interest costs, according to a new report from BMO Bank of Montreal (TSX:BMO).
In a survey of 1,500 Canadians conducted by Leger Marketing, BMO found that half of Canadians are considering a shorter amortization. Those with children are even more likely to opt for paying their mortgage sooner, at 63%.
“These numbers show Canadian homeowners are choosing responsible home financing options and are making building equity and saving on interest costs a priority,” said Katie Archdekin, head of mortgage products at BMO Bank of Montreal.
Archdekin pointed out that on a $400,000 mortgage at a 5% interest rate, moving from a 30-year to a 25-year amortization can save upwards of $70,000 in interest over the life of the mortgage.
Regionally, those in Alberta are most likely to choose a shorter amortization, at 61%, compared to just 53% in Ontario and 45% in Quebec.
Canadians who lock in low fixed-rate mortgages and opt for shorter amortization periods will benefit in the long run, according to Douglas Porter, deputy chief economist at BMO Capital Markets.
“Our interest rate outlook now projects that fixed mortgage rates will trump variable,” he says. “While the decision ultimately depends on the individual, the low rate combined with a shorter 25-year amortization will significantly strengthen household financial stability.”