Canadian real estate owners might be in for a surprise, if they have a variable rate mortgage. Bank of Canada (BoC) numbers show the estimated variable mortgage rate increased by more than a fifth The rise in rates leaves Canadians paying more to their banks, and making less of a dent on that debt pile.
Variable Rate Mortgages
A variable rate mortgage is one where the interest rate is not fixed for the life of the mortgage. Instead of locking in a higher interest rate, a borrower can have their interest calculated monthly, based on the lender’s prime rate. This can either be a win or loss for the borrower, depending on the type they have.
A variable rate borrower pays a fixed sum monthly, but the amount paid towards the principal changes. If rates go down, you pay less interest, and more goes towards principal. This reduces your balance faster, potentially saving you a lot of cash. If your rate goes up, you pay more in interest, and less towards the principal. That potentially can cost you a lot more. Let’s see how that’s changed over the past year.
The Estimated Canadian Variable Rate Mortgage Is Up Over 22%
The cost of a variable rate mortgage has been going up across Canada. The BoC estimates the typical rate reached 2.72% on December 6, up about 2.25% from a month before. The rate is now over 22.52% higher than it was just one year ago. These seem like small numbers, but they have a substantial impact.
Canadian Estimated Variable Mortgage Rate
The estimated variable mortgage rate in Canada.
Source: Bank of Canada, Better Dwelling.
Paying More To Borrow The Same
That’s a little abstract, so let’s talk about the real world impact. A borrower at the estimated rate who borrowed last year, would see their interest payments rise 22.5% higher. If they continue to make the same payments, the amount paid to principal would fall by about 6.6%. At the end of their variable term, the bank finds themselves with more cash. The borrower finds themselves with less of a dent in their mortgage.
After falling for years, interest rates are finally starting to climb higher. Up until recently, variable rate mortgages were working in favor of borrowers. As rates were cut, these borrowers made higher than expected principal contributions. Now the opposite is happening. Variable rates are rising to cool record debt pile growth, but also making it more difficult to pay off the debt.
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