Canadian mortgage shoppers have flocked to loans with fixed rates and terms of two or three years, as such shorter-term loans protect borrowers from the risk of interest rate increases in the near term without locking them into high rates for five years.Sean Kilpatrick/The Canadian Press
A recent upswing in fixed-rate mortgages may tempt some mortgage professionals to nudge clients toward variable rates, despite high uncertainty about where rates are headed next, an influential Toronto-based mortgage broker warns.
As of the week of Sept. 25, taking out a fixed-rate mortgage with a term of two or three years often comes with a higher borrowing cost than opting for a five-year variable. This may make it easy for some mortgage brokers to push longer-term variable mortgages, which pay a higher commission, said Ron Butler, founder of Butler Mortgage.
“I am not saying all mortgage brokers are commission-obsessed, most want to give good advice but in a slow marketplace will brokers be tempted,” Mr. Butler wondered on X, formerly known as Twitter.
For independent brokers, whose compensation is usually entirely based on commissions paid by lenders, the financial incentive to recommend longer-term mortgages is substantial, Mr. Butler told The Globe and Mail.
He provided the example of a three-year fixed-rate mortgage yielding a commission of 0.75 per cent of the mortgage amount, while a five-year fixed or variable mortgage would come with a payout of 1.05 per cent of the funds borrowed. On a $500,000 mortgage, those commissions would amount to $3,750 for the three-year mortgage compared to $5,250 for the five-year loan.
Borrowers’ appetite for variable-rate mortgages virtually vanished following a spate of interest rate increases by the Bank of Canada. Variable-rate loans made up only 7.4 per cent of new mortgages in May, according to a survey by Mortgage Professionals Canada, the national mortgage-broker industry association. That compares to a peak of 57 per cent in January, 2022, just before the central bank started its series of rate hikes in March of that year.
Recently, mortgage shoppers have flocked to loans with fixed rates and terms of two or three years, shorter than the five-year term Canadians have historically preferred. Such shorter-term loans protect borrowers from the risk of further rate increases in the near term without locking them into today’s high rates for five years.
But interest rates on new fixed-rate mortgages climbed higher this past week. The increase followed a spike in bond yields driven by investor concern over worse-than-expected inflation figures for August. (Bond yields affect the cost of financing fixed-rate mortgages for lenders.)
Now several lenders are offering lower rates on five-year variable-rate mortgages than on two- or three-year fixed-rate loans. For example, as of Sunday, Butler Mortgage advertised online a two-year fixed-rate mortgage with a 6.44-per-cent interest rate and a five-year variable at 5.9 per cent for borrowers in Ontario. (There is also a three-year variable option, but it comes with a 6.4-per-cent rate.)
The website of Calgary-based True North Mortgage showed Ontario users a two-year fixed at 6.54 per cent; a three-year fixed at 6.19 per cent; and a five-year variable at 5.99 per cent. Similarly, the Bank of Montreal’s BMO-T website was showing a two-year fixed at 7.69 per cent; a three-year fixed at 7.25 per cent; and a five-year variable at 7.2 per cent.
If the trend continues, five-year variable rates will regain some appeal over shorter-term fixed mortgages, according to Mr. Butler. That would make it easier for commission-focused brokers to sell variable mortgage rates, he added.
Some economists and financial analysts are predicting that the Bank of Canada has reached the peak of its rate-hike cycle. “If you’re a mortgage professional, you can say to your client, ‘Hey, look. We’ve got all these headlines over here that say there’s going to be no more variable-rate increases,’” Mr. Butler said. (Variable mortgage rates usually move up or down following changes in the central bank’s trend-setting rate.)
In fact, there’s no consensus that the rate hikes are over. The Bank of Canada has two more chances to increase its benchmark rate before the end of the year. Whether it will do so depends on what economic data – and especially inflation readings – show, several economists have warned.
Some mortgage brokers may sincerely believe that future rate hikes are out of the question, Mr. Butler said. And there are reasons – such as greater flexibility – why some borrowers may still prefer a variable right now. But some brokers will likely push five-year variable rates because of the financial incentive, he added.
“I don’t think the majority of mortgage brokers are influenced by this issue, but I think it would be ridiculous to say that none are,” he said.
Compensation for mortgage advisers working for the banks is also often based at least partially on commissions.
BMO said compensation for its mortgage specialists is commission-based. National Bank of Canada NA-T said compensation for some of its mortgage specialists is entirely commission-based, while it consists of a base salary plus a commission component for those based out of bank branches. At CIBC CM-T, remuneration for mortgage advisers includes commissions as well as other forms of compensation. Bank of Nova Scotia BNS-T also said its mortgage specialists are paid in part based on commission.
But all four banks said their commission structure is not tied to the length of mortgage terms. National Bank and Scotiabank also sell mortgages through the broker channel.
Royal Bank of Canada RY-T declined to say whether its mortgage representatives receive commissions, saying it does not publicly share details about employee compensation.
Toronto-Dominion Bank TD-T did not respond to questions about how it pays its mortgage advisers.
