Canadian interest rates are surging and that brings up a lot of questions about those with variable mortgage rates. Bank of Canada (BoC) data shows most new borrowers were opting for variable rate mortgages in May. However, the share has been falling from the record peak sparked by the central bank’s lag to keep up with the bond market. While soaring interest rates might present a concern, the recent variable rate binge is far from normal for Canadians, who generally prefer fixed and predictable payments.
Canadian Variable Rate Mortgage Growth Is Slowing
Canadians borrowing with variable rates is the only segment of mortgages growing, but it’s slowing down. New variable rate mortgage debt came in at $22.7 billion in May, up 4.8% from last year. It was the lowest growth for variable rate mortgages since January 2020, but didn’t contract like new mortgage credit growth in general.
Most New Mortgage Debt Is Variable Rate
Mortgage debt with variable rates was still the majority of borrowing, however it likely won’t be by next month. Debt with variable interest costs represented 50.9% of new mortgage debt in May. The share fell 2.2 points from the previous quarter but it remains 8.2 points higher than last year. Still unusually elevated due to the BoC lagging on rate hikes compared to the bond market’s impact on fixed rates, but that’s off the record high.
Most New Canadian Mortgage Borrowers Are Going Variable Rate
The share of Canadian mortgage origination dollars lent with variable interest costs per month.
Source: Bank of Canada; Better Dwelling.
Most Canadians Prefer The Predictability of Fixed Rate Mortgages
The recent surge of variable rate mortgage debt is an outlying event for Canadians, who prefer predictability. Just $461.8 billion of outstanding mortgage debt at institutional lenders was variable rate in May. Just under a third (32.5%) of residential credit outstanding is variable rate, with roughly half (53%) originating in the past year. Keep in mind a typical mortgage is for 25 years, and most of the variable rate debt is new.
The failure of the BoC to keep up with the bond market left a perceived opportunity for borrowers. They saw a market inefficiency that essentially looked like free money, but it might be costing them a lot more. With yesterday’s rate hike, variable rates based on the average lender prime are higher than many of the 5-year fixed rates that were offered a few months ago.
Also worth noting recent borrowers were generally stress tested at rates significantly higher than current variable rates. It’s annoying to pay more, but not even close to the disastrous-doomsday scenario played up.