Variable mortgages cost Canadians tens of thousands amid high rates. Is the risk worth it?
September 21, 2023 · Source: GN Mortgage Rates
AI Summary
Rapid interest rate hikes by the Bank of Canada have significantly increased costs for variable-rate mortgage holders, prompting questions about the risk-reward trade-off of choosing variable over fixed rates.
What Happened
The Bank of Canada raised its benchmark interest rate 10 times over the past 18 months, pushing variable mortgage rates sharply higher. As a result, Canadians with variable-rate mortgages are now paying tens of thousands of dollars more annually, raising concerns about affordability and financial stress.
Timeline
Bank of Canada begins hiking rates from near-zero.
Cumulative 10 hikes bring policy rate to a multi-decade high.
Variable-rate mortgage holders report significant payment increases.
Background
Variable-rate mortgages are tied to the Bank of Canada's policy rate, so when the central bank hikes, borrowers' interest costs rise immediately. Fixed-rate mortgages are locked in for a term, shielding borrowers from short-term fluctuations. The recent aggressive hiking cycle was aimed at curbing inflation, but it has disproportionately affected variable-rate borrowers.
Why It Matters
Household Finances
Higher mortgage payments reduce disposable income, forcing some families to cut spending or dip into savings.
Housing Market
Increased borrowing costs may cool housing demand, potentially leading to price declines in some regions.
Financial Stability
If many borrowers default, it could stress the financial system, though banks have so far been resilient.
Impact calculator
Mortgage Calculator
Estimated monthly payment
$2,668
on a $480,000 mortgage
Estimates for general guidance only — not financial advice.
Commentary
Pros
- Variable rates can be cheaper when rates are stable or falling.
- Borrowers can benefit from rate cuts in the future.
- Some variable mortgages have fixed payments, providing budget certainty.
Cons
- Payments rise immediately when rates increase.
- Unpredictable costs make budgeting difficult.
- Tens of thousands in extra interest can be financially devastating.
Risks
- Further rate hikes could push payments even higher.
- Job loss or other financial shocks could trigger defaults.
- Homeowners may be forced to sell at a loss.
Opportunities
- Borrowers can refinance to fixed rates to lock in certainty.
- Rate cuts may come if inflation cools, benefiting variable holders.
- Financial planning can mitigate risks, such as building emergency funds.
Analyst confidence:
Perspectives
- Variable-rate mortgage holders
- They feel the immediate pain of rate hikes and question whether the initial savings were worth the risk.
- Financial advisors
- They often recommend fixed rates for risk-averse borrowers, but note variable can be suitable for those with financial flexibility.
- Bank of Canada
- It focuses on controlling inflation, acknowledging that rate hikes have uneven effects on households.
This article's language only
Bias Analysis
How this piece is written
The article uses emotive language like 'squeeze' and 'pinch' to describe the impact on variable-rate borrowers, which may evoke sympathy. It frames the situation as a 'risk' without presenting counterarguments from those who benefit from variable rates. The headline suggests a negative outcome, potentially influencing reader perception.
Historical Context
In the 2010s, variable rates were often cheaper than fixed, and many borrowers chose them to save money. The 2020-2021 period saw ultra-low rates, making variable attractive. However, the rapid hiking cycle from 2022 reversed that advantage, reminiscent of the early 1980s when rates spiked and caused widespread mortgage distress.
AI Prediction
AI analysis — speculative, not fact
If inflation continues to ease, the Bank of Canada may pause or cut rates, providing relief to variable-rate holders. However, if inflation remains sticky, further hikes could deepen the financial strain. The outcome depends on economic data and global conditions.
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