Canadian Mortgage Borrowers Took The Bait, Now Their Costs Are Ripping Higher

Many Canadian mortgage borrowers are regretting walking into a low rate trap. Bank of Canada (BoC) data reveals a surge of borrowers over the past few years opting for variable rates. At the time, mortgage borrowers might have saved a few points over their fixed-rate peers. Now interest costs are making one of the most aggressive climbs in history, sending their costs spiraling higher. 

The Share of Uninsured Mortgage Debt With Variable Rates Doubled Since March 2020

Variable interest rate mortgage debt surged in the uninsured credit segment. Nearly 2 in 5 (39.8%) dollars in this segment had variable interest rates in September. It’s a big climb from 29.4% last year, and just 19.1% back in March 2020. Canadians generally prefer the stability of fixed interest rates. However, we can see how fast this changed over the past few years.

Canadian Mortgage Borrowers Took The Low Rate Bait

The share of outstanding residential mortgage credit with variable interest rates.

Source: Bank of Canada; Better Dwelling.

Over A Fifth of Insured Mortgage Debt Has Variable Rates, More Than 50% Higher Than Last Year

Just over a fifth (21.2%) of insured mortgages outstanding were variable rate in September. That’s up significantly from 16.0% last year, and the 13.3% low for the period back in January 2021. Not as bad as the share seen with uninsured mortgages, but the share still climbed more than half.

Canadians Thought They Would Be Saving Money—They Were Really Wrong

The primary reason for the shift to variable rate products was the savings offered. That changed really fast. The average interest paid on outstanding uninsured debt hit 4.86% in September. That’s a massive shift from the 1.87% average during last February’s record low. These borrowers have seen their costs more than double.

Canadian Variable Rate Mortgage Borrowers See Interest Costs Surge

The average interest rate paid by residential mortgage borrowers with variable rates.

Source: Bank of Canada; Better Dwelling.

A similar trend can be observed with insured borrowers. The average interest rate reached 4.45% in September, up from the record low of 1.54% just a few months prior. It’s slightly cheaper than uninsured rates, but on a similar trajectory. 

Once again, most Canadians prefer the predictability of fixed interest costs. However, the gap between variable and fixed rate mortgages proved too tempting for many. So much that the share of mortgage debt for the variable rate market surged.

The result is a lot of consumer spending power is about to be vaporized soon. The BoC has clearly stated they need interest rates to climb even higher than the current rate. Since there’s an immediate transmission of costs, expect the pain to get even worse in the coming months. 

6 Comments

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  • Reply
    george 3 days ago

    Nobody put a gun to their head and thanks for making the houses more unaffordable than they were already! NO pity for you!

    • Reply
      Average Man 2 days ago

      1000x this. Nobody made you dingdongs buy more house than you could afford. I didn’t buy a house because I couldn’t afford it. I could QUALIFY for it fine, but I couldn’t realistically AFFORD it IRL. So I held off. And was made to feel like an idiot for it.

  • Reply
    Paul 3 days ago

    So let’s get this straight. They had a lax policy on rates. Fuelled a credit binge. Printed money until they created generational inflation. Told everyone rates would remain low. Then raise rates at a historical pace in order to “save” the economy and the tax payer from inflation, but in the process destroying the tax payer and the economy with higher rates? Am I missing something? It’s either incompetence or willful negligence.

    I’m pretty sure what happens next. Cratered and “We could have never seen this coming.” Then the melt up as they gobble up everything in sight. Good luck Canada. We are going to need it.

  • Reply
    Rick Abrams 2 days ago

    I find it impossible to express my opinion about anyone who would take out a variable rate mortgage without my seriously violating the site’s civility guidelines.

  • Reply
    Ryan 5 hours ago

    It’s very simple, if your target inflation rate is 2%, and your real inflation rate is close to 10% (I dont buy the 6.9% fallacy) then you have to go to 8% to create balance. Higher if you want to fastrack the process. What will THEY do?

    • Reply
      J 16 mins ago

      They want to slow the spill – first by drips, then a trickle, and then a steady line – hoping it will stay there rather than a pipe burst. Canada is drowning in debt. It’s just how it plays out. Slowly or an avalanche.

      Pile on the US Fed and the global debt heap. We’re in for something we have never seen.

      Hope you’re in a stable job – ride is getting bumpy.

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