Adjustable-rate mortgages are on the rise again—just look at this BatchService data

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In 2024 and 2025, 2.2 million Canadian homeowners will see their interest rate rise, representing 45% of all outstanding Canadian mortgages. This rate shock is expected to bite hard, especially since most of these borrowers secured their mortgages at record-low interest rates.

Unlike most homeowners in countries such as the United Kingdom, Finland, Australia, Ireland, and Canada, the vast majority of U.S. homeowners have fully fixed-rate mortgages. Only a small percentage of U.S. borrowers will need to refinance over the next few years.

However, as mortgage rates have risen, so has the share of U.S. borrowers opting to take out adjustable-rate mortgages (ARMs). In 2021, just 4% of mortgage originations were ARMs. In May 2024, ARMs made up 15.5% of mortgage originations.

To understand what’s going on, ResiClub reached out to the data pros at BatchService, a fast-growing property intelligence and technology company. Their data scientists analyzed mortgages in their extensive database.

At the height of the housing bubble, a staggering 45% of U.S. mortgages issued in 2005 were adjustable-rate mortgages. The fact that 80% of U.S. subprime mortgages issued before the bubble burst were also adjustable-rate mortgages, including those infamous “teaser rates,” only intensified the housing crash.

Measures aimed at curbing risky lending practices contributed to the shift toward more stable mortgage products. In mid-2009, just 2% of U.S. mortgages issued were adjustable-rate.

The analysis conducted by BatchService makes it clear that we’re once again seeing more adjustable-rate mortgages, as buyers in this strained affordability environment try to find some relief.

If inflation doesn’t surge again and mortgage rates fall a bit in the years ahead, most of these borrowers will likely not be significantly affected negatively by their decision to choose an ARM. However, if the situation reverses, that’s the risk associated with taking out an adjustable-rate mortgage.

It’s important to point out that while BatchService finds adjustable-rate mortgages are on the rise, ARM products today are different from many of the products issued in the mid-2000s. Before 2008, lenders often approved ARMs based on borrowers ability to pay the initial lower interest rates. And sometimes they didn’t even check that (remember Ninja loans). Today, adjustable-rate borrowers qualify based on their ability to cover a higher monthly payment, not just the initial lower payment.

The most common ARMs today are 5/1 and 7/1 mortgages.

Year-over-year national inventory shift

+36.6% U.S. active listings

+3.6% U.S. new listings

National housing demand has slowed and isn’t absorbing (i.e., buying) new inventory at the same rate, thus active inventory/months of supply are building despite only a small jump in new listings.

Want to better understand the inventory shift (the picture varies a lot across the country)?

ResiClub PRO members can access our inventory deep dive for 800+ metros and 3,000+ counties here.