Mortgage trends to watch closely this year

From a variable rate revival to the emergence of six-month mortgages, these are the trends that will shape the industry

The problem is, most folks aren’t exactly flipping through amortization tables on their coffee breaks. The average borrower gets a home loan only every 3.8 years or so, which is just enough time to forget what you learned while researching your last mortgage — if you had one at all.

That’s where this column comes in, it’s about helping people avoid expensive mistakes.

What’s an expensive mortgage mistake?

Well, borrowers constantly lose money for all sorts of reasons:

  • Picking a term with a lower probability of interest savings
  • Botching their rate negotiations
  • Paying unexpected fees
  • Getting sucked dry by onerous prepayment penalties
  • Overlooking the value of refinancing flexibility
  • Ignoring the opportunity cost of a shorter amortization
  • Handcuffing themselves to less portable mortgages
  • Relying on advice biased by compensation
  • Waiting years to save for a down payment while home prices run away from them.

This year’s mortgage market promises more suspense than the final outcome of the Canucks season.

Here are some things to watch closely as the year unfolds..

 Rate cuts or bust

Never before has the Bank of Canada rammed interest rates higher — on a proportionate basis — than it did from March 2022 to July 2023. The benchmark prime rate almost doubled, which has never happened in a single rate cycle.

The good news is, barring another unexpected inflation shock, today’s 7.20 per cent prime rate is on borrowed time. Consumers can’t endure a policy rate at 23-year highs for long. That’s why central banks and the investors who bet on rate direction all project a rate rollback by the second half of this year.

 A shift back to variable

 Variable-rate mortgages fell out of favour over the past 18 months, with their share of new mortgages plunging as low as five per cent last July, from a high of 57 per cent in January 2022. But once central banks signal imminent rate cuts and the discounts on uninsured variable-rate mortgages improve, more borrowers will float their rates. This shift could happen as early as spring or as late as fall or beyond.


Mortgage penalties are probably hated about as much as taxes—but tenfold. Particularly when those penalties reach into the five figures.

Take this case of an Edmonton couple that was initially quoted $17,000 to break their five-year fixed mortgage early.

But homebuyers need not fall into the trap of being stuck with enormous penalties simply to break their mortgage early. Particularly when we know that the majority of borrowers do in fact break or refinance early.

“Internal lender statistics suggest that greater than 60% of mortgages will be paid out or restructured at an average of 36 months,” says Dustan Woodhouse, a DLC Mortgage Experts broker and author of Be The Better Broker.

Consider that the mortgage of choice for 68% of the country’s 5.78 million mortgage holders is the five-year (60-month) fixed, and you can see the issue.

As a quick overview, breaking a fixed mortgage entails a penalty that is typically the greater of three-months’ interest or the interest rate differential (IRD). To calculate your potential penalty were you to break your mortgage early, check out this calculator.

No matter how the penalty is calculated, for many borrowers that equates to some serious moola.

Woodhouse says the average penalty he sees is about 4.5% of the balance on a four-year fixed or longer fixed term, while the record was 7.7% with a major chartered bank, on a “significant” mortgage.

“We see absolute devastation when it is 5%-down buyers in a flat or declining market that also paid a 4.15% CMHC premium, and are paying Realtor fees to sell,” he says. “It is costing some of those people tens of thousands to get out of their property. And it could have been avoided.”

How to Avoid Mortgage Penalties

Being informed is a buyer’s greatest defence against punishing penalties down the road.

As Woodhouse puts it, “The greatest danger in our business is not unanswered questions, the greatest danger is unasked questions.”

This is where a broker can come in handy, particularly for unexperienced buyers, as they can help find a suitable mortgage product that balances a competitive rate with the features and flexibility that are right for the buyer, such as a reduced penalty should they need to break the mortgage early.

As we’ve written about previously, many mortgage shoppers tend to put greater emphasis on finding the lowest rate, which may save more money up front, but can potentially cost more over the long run. For example, a typical penalty on a full-featured mortgage would be three months’ interest vs. 2.75% of the mortgage balance for a “low-frills” or discount rate mortgage.

Plan for the Unexpected

Woodhouse says all borrowers need to be realistic about the possibility that they may move or refinance sooner than expected, which is why it’s one of the key discussions he has with his clients.

“The conversation around how pre-payment penalties are calculated are of just about the highest importance when it comes to how I work with my own clients,” he said. “I lead with the topic of prepayment penalties on every client inquiry, within the first 15 minutes or less.”

And while brokers may be able to assist homeowners after the fact, when a mortgage penalty is imminent, he says there is no replacing choosing a mortgage with flexible pre-payment privileges right from the start.

“Once the penalty is in play, there are some techniques for reduction that skilled brokers are aware of, but they rarely reduce it by more than 20%,” he said. “The best strategy is knowing what you are committing to upfront.”

While there are many fixed-rate products that offer flexible pre-payments and fair penalties, another option is to forget about going fixed at all.

Many variable products entail just a 0.50% of balance penalty, which is about nine times lower than the going fixed-rate penalty, Woodhouse notes.

“Life is variable, perhaps your mortgage should be as well,” he says.

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