Despite rock bottom borrowing rates, some Canadian real estate buyers are paying more. Bank of Canada (BoC) numbers show variable rates on residential mortgages made a big jump. Even with borrowing rates generally falling, variable interest mortgages are at a six year high.
Variable Rate Mortgages
Variable rate mortgages are when the borrower sees the interest rate fluctuate. Payments usually stay the same, but the amount that goes towards interest fluctuates. If rates rise during the term, the borrower pays more interest, and less principal. If rates fall during the term, borrowers pay less interest, and more principal. At the end of the term, depending on rates, you may have a bigger or smaller mortgage balance than expected.
Uninsured Variable Rates Are Up Over 26%
Uninsured rates made a very large increase over the past year. The rate paid on new uninsured residential mortgages hit 3.74% in July, up 1.63% from a month before. The rate is now 26.35% higher than it was during the same month last year. Rates are the highest they’ve been in at least 6 years, and likely beats that record for some time.
Canadian Variable Rate Mortgages – Uninsured
The weighted index rate, paid on new variable rate residential uninsured mortgages.
Source: Bank of Canada, Better Dwelling.
Insured Variable Rates Are Up Over 36%!
If that wasn’t a fast enough climb, you should see how fast insured variable interest rates are rising. The typical rate in this class reached 4.08% in July, up 2.25% from the month before. Compared to the same month last year, this number is 36.45% higher. This is the highest rate insured variable rate borrowers have been taking out, in at least 6 years.
Canadian Variable Rate Mortgages – Insured
The weighted index rate, paid on new variable rate residential insured mortgages.
Source: Bank of Canada, Better Dwelling.
Variable mortgage rates are rising, when the overnight rate hasn’t moved. In an environment where borrowing costs are generally falling, this number rising is a little strange. Some of this has to do with higher capital costs, which are passed on to consumers. However, some of it is just banks taking a bigger cut from a segment.
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Remember young padawans. In bad times, the central bank will discount the overnight rate to help with liquidity. That doesn’t mean banks will pass on the discount, as the risk increases.
https://www.abc.net.au/news/2019-10-15/transparency-not-another-inquiry-make-banks-pass-rate-cuts/11600408
Why wouldn’t they pass on the discount? Seems strange, since the margin buffer is about the same.
When risks are higher, banks will look to pad their margin. Often I read these articles expressing concern that banks aren’t passing on rate cuts, as though they’re obligated to pass on rate cuts. There is no such obligation, nor should their be. A lender will allow their margin to increase or decrease according to perceived risks and in response to competitive pressures from other lenders.
Because this episode is called Return of The Risk Premium.
If this rate rise continues, Baby Boomers will not be able to refinance their Homes under HELOC. Who will buy all those condos than?
This article appears to be factually incorrect. Insured variable interest rate mortgages are readily available with basically every lender in Canada at ~3% or less. This article is suggesting rates of over 4% for insured mortgages in July 2019. Please provide a direct link to BOC statistics supporting this.
Here ya go, a simple Google search found it:
https://www.bankofcanada.ca/rates/banking-and-financial-statistics/interest-rates-for-new-and-existing-household-lending/
There it is in black and white in the table called MONTHLY SERIES, MORTGAGES:
– insured variable rate 2019-07 = 4.08%
– uninsured variable rate 2019-07 = 3.74%
Yes, I’m with Nick, AND we will see a rate CUT before the end of the year. No doom and gloom.
How is a rate cut a good thing?
People in the real estate industry don’t understand a rate cut when the economy is doing poorly (except when they cut in 2015 on bad data, that Statistics Canada later corrected). They think rates cut, commissions go up. They never factor the next cut comes when employment starts falling.
I thought they can always switch to fixed rate at anytime no? The fixed rate is at record low why don’t they just switched?
Canadian variable-mortgage rates are still widely offered at 3% or below.
The BoC must be counting home-equity lines-of-credit (HELOCs) in their statistics for average variable rates. These are typically offered at prime + 0.50%, which works out to 4.45% today.
There has been a spike in HELOC borrowing of late, and if the BoC is counting HELOC rates and variable rates together, that explains how it would come up with an average rate of 3.76%.
The title of this article is totally misleading, as are its conclusions. Simply put, the author should have done more research. With due respect, this article should be taken down for the sake of the credibility of this publication.
Couldn’t agree more! Completely useless information when taken out of context!
Insured variable @ Prime -1.00%
Uninsured (conventional) variable @ prime – .75%
HELOCs – 4.45%
3 completely different products that shouldn’t be lumped together!
I would never agree to a variable rate because no bank employee can ever give me a straight answer on how the “prime rate” is calculated. If it was just straight forward “Bank of Canada Overnight Rate + 100 basis points” it would be somewhat sane. But the way variable rates are actually implemented is ridiculous. You’re giving someone a legal way to take your money and they have no reason not to use it to the maximum extent allowed under the law.
Studies have shown variable saves more money over time.