Most Canadians Are Still Opting For Variable Rate Mortgages, But That’s Changing Fast

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.

3 Comments

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  • GTA Landlord 2 months ago

    Silly when the central bank is warning people they’re going to keep raising rates. Borrowing now might not carry much of a premium, but you still had a chance until recently to lock in historically low rates.

  • richard stanbridge 2 months ago

    does anybody know what the average BOC rate is for the past 50 years?
    does anybody believe the CPI in Canada is lower than the US, especially where the C$ is right now?
    does anybody realize the global central banks more or less gave away free money for 12 years?
    does anybody realize that has never happened in the history of humanity?
    so where do you lay the blame for this mess?

  • Ron Davidson 2 months ago

    In reply to Richard Stanbridge the primary individual responsible for this global mess is Allen Greenspan. Most people don’t realize that he started destroying the world economy in the 1980’s long before he was in charge of the Federal reserve. He was Regan’s chief financial advisor and was the brains behind Reaganonics. He believed that he could provide perpetual prosperity by printing money and artificially manipulating interest rates. Anybody with half a brain could see he was a complete financial idiot but he bamboozled the congress and senate with very big rarely used words so nobody could understand what he was saying. If you took the time to analysis his words he was basically saying nothing. After the US housing collapse many senators came forward and said that they never understood what he was saying as his words and sentences were so complicated. All of them thought he was a genius on another level that they couldn’t understand. He was then followed by Bernanke, Yellen and now Powell. All of them are complete idiots and in the case of Yellen and Bernanke academics who have never even operated a lemonade stand. Every single prediction all of them have made is 100% wrong. Why do we keep putting people in charge when their track record is so dismal. To effectively run the economy you need to harness the brain power of these senior academic economists. Gather all their opinions and predictions and do the exact opposite and you instantly have a perfect financial system. Please utilize their lack of intelligence and their 100% wrong ideas to craft a new economic miracle. It is so very simple.

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