Canada

More Interest, and Less Equity? Canadian Variable Rate Mortgages Rise Over 13%

Canadian homeowners might find themself with less home equity accrued than planned. Bank of Canada (BoC) data shows a significant climb for variable rate mortgages in January. The rise in rates can leave existing borrowers paying more interest, and a lot less to principal.

Variable Rate Mortgages

Variable rate mortgages are when the interest rate is not fixed, and evaluated on a monthly basis. Instead of one rate to rule your mortgage term, borrowers play interest rate roulette. It’s based on the lender’s variable prime rate, and gets evaluated every month. Why would anyone want to do this? Because generally speaking, these rates are much lower than a fixed rate when signing up. No brainer, right? Well, the lower upfront cost doesn’t always work in favor of the borrower.

Variable rate borrowers pay a fixed sum monthly, but the principal contribution varies. Instead of paying down the same amount of principal every month, it depends on the direction of the rate. If rates drop, they pay less interest and add more to principal. That can save them a lot of cash, like it did as interest rates dropped to record lows. When rates rise however, they pay more interest and less principal. That means borrowers can end up not paying a whole lot down over the term of their mortgage.

The Estimated Canadian Variable Rate Mortgage Is Up Over 13%

Variable mortgage rates are on the rise across Canada. The estimated variable mortgage rate reached 2.77% as of Jan 24, up 1.46% from a month before. This represents a 13.06% increase from last year, and a 17.87% increase compared to the one year low hit on July 05, 2018. Currently we’re at the highest levels we’ve seen in over a year.

Canadian Estimated Variable Mortgage Rate

The estimated variable mortgage rate in Canada.

Source: Bank of Canada, Better Dwelling.

Estimating The Impact To Household Payments

Running some quick numbers helps to put the impact into perspective. Let’s say a borrower started their variable rate mortgage at 2.45%, and the rate increased to today’s 2.77%. The borrower’s interest payments rise by 13% – that’s straightforward. However, if they continue to pay the same amount, their principal contribution drops by ~10.95%. Borrowers on a longer term will accrue less equity than they probably planned on having. Those with shorter terms will likely have to find extra cash to keep the ratio balanced. Which is fine, you didn’t need the money from that raise anyway, right?

Falling interest rates worked in favor of variable rate borrowers for years. Slowly global interest rates dropped, allowing higher principal contributions to variable borrowers. This gave households an unexpected windfall, along with higher buyer liquidity. Now rates are rising, working against variable rate borrowers, and dropping liquidity.

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9 Comments

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  • IIS 10 months ago

    Going to keep rising too. This is less of a Bank of Canada issue, as its a global interest rate issue. The BOC cut rates on an oil slump in 2015 to avoid a recession. In 2019, they’re “data dependent,” which basically means we can only do so much as a result of our economy being linked to the USD. If they cut while the US raises, all businesses that do cross boarder will be screwed.

    People whining about how their bills are going to go higher, should consider what happens if they lose their job permanently due to US trade slowing down because it’s too expensive to buy goods from the US.

  • Mo 10 months ago

    Variable rate or fixed rate for a mortgage renewal?

    • El Nino 10 months ago

      I would say to try and lock in a 2-3 year fixed to get a reasonably low rate in the near term and then re-evaluate the government response after the recession hits in 2020

  • SUMSKILLZ 10 months ago

    I’m guessing the average person just thinks, “it-is-what-it-is” and goes on with their day. I think weekly grocery bills crossing disturbing thresholds are more likely to get someone’s attention than, “you gained less equity than you think” statements when renewing your mortgage.

    • John 10 months ago

      Interesting how banks started to push variable rate mortgages in 2018 instead of the 5 year fixed we’ve obsessed over for 10 years.

      Almost feels like…. whatever the bank says, do the opposite.

      • Big Joe 10 months ago

        They are not in the business of making you money.

      • BikeMike 10 months ago

        Of course you should do the opposite of what the bank says – after all, they’re in it to make money from you. 🙂

  • Jay 10 months ago

    Check it out. 100% of Bank of China’s residential insurance (oct 2018) are uninsured. Totaling to approx $1B for HELOCs and mortgages!

    http://pic.bankofchina.com/bocappd/canada/201812/P020181203622323307333.pdf

    also funny stat from that PDF… there are zero mortgages in Quebec from the Bank of China (Canadian Arm).

  • Depth386 10 months ago

    How is this even “concerning” at 2.77%?

    I am on a 3.05% 5 Year fixed and not sweating about renewal.

    Maybe if you owe $2M on a milk crate in Vancouver then it’s an issue.

    Don’t get me wrong, I am not some RE agent or developer who’s perma bullish and nothing would make me laugh more than Vaughan, Richmond Hill, Oakville, and equvalent posh Vancouver area residents getting escorted out onto the street by power of sale sheriffs but seriously the paragraphs leading up to *gasp* not even 3%

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