Canada’s central bank warned real estate buyers to prepare for higher interest rates. It appears buyers are calling their bluff, opting for little rate protection on loans. Bank of Canada (BoC) data shows the share of new mortgages with variable rates doubled in October. Interest costs on most new uninsured mortgages will rise with rates, as borrowers bet they can’t climb by much.
Most New Uninsured Mortgage Debt In Canada Has Variable Rates
Uninsured mortgages represent the lion’s share of mortgage debt in Canada. These are mortgages where the owner has sufficient equity in the home, but tends to carry higher costs. In October, there was $34.3 billion of new uninsured mortgage debt, with 58% being variable rate. This time last year, the share was less than half the size while interest rates were falling.
The most recent data shows a minor decline in the share of variable rate debt. October’s share was about one point lower than the peak hit in August. Borrowers with substantial equity definitely aren’t scared of higher interest costs.
The Share of Variable Rates On Insured Mortgages Has Doubled
Insured mortgage debt, required for mortgages with less than 20% equity, is climbing. In October, $7.3 billion of insured mortgage debt was borrowed, with 34.7% being variable rate. It’s a smaller share than uninsured mortgages, but still double the share of last year.
Once again, this is down slightly from the peak seen earlier this year. October’s share of variable rate mortgages fell 0.4% from the peak hit in August. Still, this is way above any normal levels for insured mortgages.
More Canadians Are Opting For Variable Rate Mortgages
The share of new Canadian mortgage debt issued with variable interest rates.
Source: Bank of Canada; Better Dwelling.
Canadian Home Buyers Are Betting Against Rates Rising Sharply
Some mortgage experts have said the central bank’s ability to raise rates will be limited. A lot of variable rate debt exists, creating a vulnerability for households. Rising interest costs will crush variable rate borrowers if rates rise, is a common argument. Ironically, borrowers understand this risk, creating moral hazard. People are opting for cheaper variable rate mortgages since they don’t believe the BoC can raise rates sharply enough to impact them.
Politically it’s unpopular to ignore the size of variable mortgages when raising rates. The risk is most likely overstated, though. Since 2017, Canada’s bank regulator created the mortgage stress-test for this exact scenario. Most borrowers have now been tested to ensure they can pay much higher interest costs.