• Fri. Dec 1st, 2023

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Canadian Mortgage Borrowers Took The Bait, Now Their Costs Are Ripping Higher

Many Canadian mortgage borrowers are regretting walking into a low rate trap. Bank of Canada (BoC) data reveals a surge of borrowers over the past few years opting for variable rates. At the time, mortgage borrowers might have saved a few points over their fixed-rate peers. Now interest costs are making one of the most aggressive climbs in history, sending their costs spiraling higher. 

The Share of Uninsured Mortgage Debt With Variable Rates Doubled Since March 2020

Variable interest rate mortgage debt surged in the uninsured credit segment. Nearly 2 in 5 (39.8%) dollars in this segment had variable interest rates in September. It’s a big climb from 29.4% last year, and just 19.1% back in March 2020. Canadians generally prefer the stability of fixed interest rates. However, we can see how fast this changed over the past few years.

Canadian Mortgage Borrowers Took The Low Rate Bait

The share of outstanding residential mortgage credit with variable interest rates.

Source: Bank of Canada; Better Dwelling.

Over A Fifth of Insured Mortgage Debt Has Variable Rates, More Than 50% Higher Than Last Year

Just over a fifth (21.2%) of insured mortgages outstanding were variable rate in September. That’s up significantly from 16.0% last year, and the 13.3% low for the period back in January 2021. Not as bad as the share seen with uninsured mortgages, but the share still climbed more than half.

Canadians Thought They Would Be Saving Money—They Were Really Wrong

The primary reason for the shift to variable rate products was the savings offered. That changed really fast. The average interest paid on outstanding uninsured debt hit 4.86% in September. That’s a massive shift from the 1.87% average during last February’s record low. These borrowers have seen their costs more than double.

Canadian Variable Rate Mortgage Borrowers See Interest Costs Surge

The average interest rate paid by residential mortgage borrowers with variable rates.

Source: Bank of Canada; Better Dwelling.

A similar trend can be observed with insured borrowers. The average interest rate reached 4.45% in September, up from the record low of 1.54% just a few months prior. It’s slightly cheaper than uninsured rates, but on a similar trajectory. 

Once again, most Canadians prefer the predictability of fixed interest costs. However, the gap between variable and fixed rate mortgages proved too tempting for many. So much that the share of mortgage debt for the variable rate market surged.

The result is a lot of consumer spending power is about to be vaporized soon. The BoC has clearly stated they need interest rates to climb even higher than the current rate. Since there’s an immediate transmission of costs, expect the pain to get even worse in the coming months. 


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