Canadian homeowners are back to their borrowing binge, and paying more for it. Bank of Canada (BoC) data shows variable mortgage rates climbed into September. New variable rate mortgage borrowers are paying the highest average interest rate in at least half a decade.
Variable Rate Mortgages
Generally in Canada, a variable rate mortgage sees the interest rate fluctuate, but payments stay the same. The interest rate changes based on the movement of the lender’s prime lending rate. If it goes down, more of your payment goes towards paying off the principal. If it rises, more of your payment gets eaten up by interest costs. It’s all the fun of gambling, but with how much you pay your lender!
Why would anyone take a variable rate loan? It offers the lowest interest rate when you’re signing up. Fixed rate mortgages are higher, but you pay the same rate throughout the life of your mortgage. If rates drop, as they have until 2017-ish, it’s been a total win for variable borrowers. If rates climb, as they have for the past few months, you lose a little.
Worth a quick mention: Since most people borrow from banks, both rates are likely higher than the rate obtained from a mortgage broker. That’s another article for another day though. Today, we’re only focusing on what people actually pay.
Canadians Are Paying Over 25% More For Variable Mortgages
New lending to variable rate mortgage borrowers in Canada has been climbing. The average variable interest rate for new mortgages reached 3.89% in September, up 1.57% from a month before. Compared to last year, this is 25.89% higher than borrowing in the same month. This is the highest the rate has been in the central bank’s recent records.
Canadian Variable Mortgage Interest Rate
The average interest rate for newly advanced variable rate mortgages.
Source: Bank of Canada, Better Dwelling.
Last year variable mortgages saw interest rates rise very fast. The 12-month growth in September is higher than anything seen in the data prior to May 2019. The rate itself, is also the highest going back at least 4 years, but likely goes back much further. The years 2016-2017, were the cheapest mortgage funds available in Canadian history.
Canadian Variable Mortgage Interest Rate Change
The 12-month percent change in the average interest rate for newly advanced variable rate mortgages.
Source: Bank of Canada, Better Dwelling.
Canadians are paying more for variable rate mortgages than they have in years. Most of this is due to the widespread belief that rates will fall, as the economy slows. We’ll let you stew with that thought on your own.
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This class of “investor” doesn’t really care about a cost basis. I keep hearing “my home doubled in value” since 2000. No crap, so did mine. Except I realize the interest paid is almost the cost of that doubling too.
Unless you flipped a condo in the short window, it’s much harder to actually make money over the long term. Once they get to a certain price point, a house stops appreciating at the rate it can absorb credit. i.e. my detached is about where it was three years ago.
I agree Ian. The media has been posting nonsensical articles about the wealth of the middle class being just fine because their homes have been increasing in value. This is naive or deceptive at best and perhaps even disingenuous from a more cynical perspective.
This is actually just the inflation of a necessary commodity that must be replaced at inflated prices after selling at inflated prices. Net profit equals zero yet people tout how much wealth they have accumulated.
The idea that our homes are our biggest investment is misplaced. Smart money knows that our homes are our biggest expense and that the more extravagant they are the higher your fixed cost of living is.
I realize that it also means that more money can be borrowed against our homes but more personal debt is not a good financial strategy unless it generates cash flow. Likewise a house is not an investment unless it does the same.
From the looks of it, a rate cut is coming. A variable rate mortgage is just smart thinking right now, especially if the economy is slowing down.
lol. I hope that was a joke.
Rate cut unlikely due to high household debt.
Ed, my take is that if the economy slows down,the bond market may rally matching any decrease in the variable rate brought about about by a cut in bank of canada rate. (Right now fixed rates are lower than variable rates).
There is a risk that banks do not pass their decreases borrowing costs completely in the form of lower fixed rate mortgages because current stress test rules mandate a new stress test when borrower opts to change lender.
‘If it rises, more of your payment gets eaten up by interest costs.’
And if the property is decreasing in value the equity gets eaten away from both ends. Add delinquent property tax, secured HELOC, etc, etc, etc, at renewal time mortgage/value might put the deal outside acceptable limits.
‘…we’ll take that house now…’
Does a refinancing constitute a new variable loan in this context?
In BC, most variable mortgage loans payment rise when rates go up and your monthly payment is not fixed. Used to be but not anymore.
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