Canadian Mortgage Borrowers Are Betting Against Rising Rates, Despite Warnings

In the upside-down world, a weak economy is great for Canadian home prices — and people are betting on it. The majority of mortgage debt issued in August has a variable interest rate. This is when a borrower’s interest paid is attached to market rates, as opposed to a fixed rate. Experts, including the central bank, are warning rates will begin to make a sharp rise next year. Whether homeowners realize it, they’re betting experts are wrong about the recovery.

More Than Half of Canadian Mortgage Debt Issued Is Variable Rate

The majority of mortgage debt lenders have issued, have variable interest rates. The value of the segment reached $24.6 billion in August. This represents 54.3% of funds lenders delivered to mortgage borrowers that month. A year prior, the share of variable rate debt was about half that, so this is a huge surge in popularity. People usually opt for the predictability of fixed rates.

Canadian Variable-Rate Mortgage Market Share

The share of monthly mortgage debt issued by Canadian lenders with variable interest rates. Share is measured in dollar volume.

Source: Bank of Canada; Better Dwelling.

Over 58% of Uninsured Mortgage Debt Issued Was Variable Rate

Uninsured mortgage borrowers did most of the variable rate borrowing. There was $21.6 billion in uninsured variable-rate mortgage debt issued in August. This works out to 58.4% of all uninsured mortgage debt issued that month. Variable-rate mortgages only had half the market share a year before. Prior to the pandemic, it wasn’t even a double-digit market segment. 

Canadian Variable-Rate Mortgage Market Share

The share of monthly mortgage debt issued by Canadian lenders with variable interest rates. Share is measured in dollar volume.

Source: Bank of Canada; Better Dwelling.

Insured Mortgages Are Still Mostly On Fixed Terms

Insured mortgages were the remaining share of variable rate mortgage debt. The segment represented $3.0 billion in August, about 35.8% of the insured mortgage debt issued in the month. A year ago the share was just under half of that (16.0%) and prior to the pandemic, it wasn’t even a double-digit market share. 

Why are variable rate mortgages so popular? They’re about 75 basis points cheaper than a 5-year fixed mortgage rate. This is huge savings, and borrowers don’t see variable rates rising fast enough to wipe out those savings. Experts warn variable rate mortgages can rise very quickly next year, doing exactly that. One of those experts is the Bank of Canada. 

The economy would need to weaken and inflation would need to fall to avoid a rise in variable interest costs. There’s so much moral hazard right now, homeowners are betting on a weak economy because they think it’s good for them. Mom & pop became Wall Street right before the Great Recession. The economy might get hurt but that would be a net benefit for their assets. Maybe a nuclear disaster or climate collapse will happen. Then home prices can triple.

Borrowers are stress-tested, so the fear of rising defaults due to a jump in interest costs is unlikely. The macro concern is mostly related to the shift in consumer spending in the rest of the economy. Just because you can afford to pay more for your mortgage, doesn’t mean it’s a good thing for the economy. The money diverted to paying mortgage debt comes from consumer spending and investments.



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  • Oldguy 3 years ago

    You should read some of the junk that various “expert realtors” are sending to anybody that they can find. Just as you say, they take the approach that there is no way that rates will ever go up to the point where variable rates exceed fixed rates. Ergo, only a fool would take on a fixed rate obligation.
    So you are correct. The game is over and the “house prices will always go up and the government will always cover my ass” folks have won. The numbers do not lie.

  • D 3 years ago

    Suckers getting in on real estate thinking they’ll be rich in 30 years. Meanwhile most millionaires aren’t millionaires because homes are over valued. A real rich person has a multi-million dollar net worth and hundreds of thousands to millions of dollars in the bank as F-you money. There’s only two ways to be this rich: 1)be very smart and have some ability to cheat 2)be a very good cheater with some intelligence. Multi-millionaires start successful businesses after trying numerous times, bought equities on the el cheapo, loan money either through personal loans to others or buying bonds and above all else have social cachet.

    • Robert Christian 3 years ago

      Wow, I couldn’t agree with you less.
      Inflation today is simply overwhelming. Owning anything of tangible value will continue to escalate – and its the compounding that really adds to the capital net worth. Own your home……then maybe a cottage or income property…… down those mortgages with rent money while the values continue to compound in value.

    • Canadian Immigrant 3 years ago

      I don’t want to be a multi millionaire, I want to have a place that I can afford to house my family . A lot of ppl just did that with some who tried what you just said they are trying.
      If the banks raise the interest rates at a steady pace to protect Canadians from inflation meanwhile sinking families into more debt all while stuffing their pockets, well then you know this was just a master plan. No matter which way it goes the banks win, obviously.

      If my house depreciates 200k I wouldn’t like it but I wouldnt cate if I could still afford it. If my house depreciates the same amount and you raise the rates , then you intentionally tried to F me. My 2 cents.

      As for the multi millionaires, I’ve seen them I’ve talked to them . They are miserable ppl chasing numbers , accumulation , accumulation. Alexander The G said it best, you enter this world with empty hands and you leave the same way. Happiness my friends wins the game, and Happiness is a mind set.

  • JCH 3 years ago

    The moral hazard level is insane. The “Fed put” is alive and well in Canada too. (Google “wikipedia Fed put” /Greenspan put for a nice summation). Canadian home speculators know that housing is now too big to fail.

    Didn’t some moron once say, “if you owe the bank a million dollars, you have a problem. If you owe them a billion dollars, THEY have a problem’? True here too.
    Inevitably this will all collapse and our economy will rival Japan’s with systemic deflation, but the party won’t stop any time soon. In the meantime the politicians know the most important thing is to get re-elected, and will do whatever that takes.
    Since the economy is so fundamentally weak from all that debt, inflation will fall if they even hint at raising rates, so the speculators really might win on this, at least in the short term.
    Ugh, hating this stupid country and the corrupt people who run it (getting embarrassing to be a Canadian!)

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