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Variable Rate Mortgages Are Booming – Is It The New Trend?
Variable rate mortgages are surging as Canadians pile on the cheap debt, betting that we won’t see a Bank of Canada interest rate hike until the end of next year.
The national bank recently noted that more than half of new mortgages made by banks, including renewals and refinances, were variable rates in July.
With the share of new variable rate mortgages at 51.3% and fixed-rate at 48.7%, this is the first time in at least five years that variable has taken the lead.
This could be due to the widening spread between fixed and variable rates. For a 5-year term in July, there was a 79 basis point spread in favour of variable rates, the highest since June 2018.
Homebuyers who go with variable over fixed increase their buying power by 9% for the same monthly payment, he said.
Meanwhile, rates continue to fall. Three of Canada’s big banks have already lowered rates.
TD Bank cut its insured 5-year fixed rate from 2.34% to 1.89% and its uninsured 5-year fixed rate from 2.44% to 1.99%. CIBC lowered its special-offer uninsured 5-year fixed rate to 2.24%, after a earlier 5 basis point cut just days before. Its 5-year variable rate went to 1.35%. RBC lowered its uninsured 5-year fixed rate by 25 basis points to 2.19%.
It is being claimed the moves follow a fall in bond yields over recent months, which tend to lead fixed mortgage rates.
It also seems the best 5-year variable rate among all lenders right now is 0.98% and the best 5-year fixed is 1.75%.
But what about when rates rise? Will the payment shock leave the Canadian economy vulnerable?
Canadians have piled on mortgage debt during the pandemic, driven by historically low interest rates and the desire for more space.
In Q2 of this year, Canadians took out 410,000 mortgages, the biggest quarterly jump on record and up 60% from the same time last year, data from Equifax shows.
And the size of mortgages is also increasing, reports the Financial Post’s Stephanie Hughes. The average new mortgage loan jumped 22.2% from last year to more than $355,000.
Equifax’s report also raises a red flag about home-equity lines of credit known as HELOCs, which rose 56.7% from the year before to the highest in 10 years.
“The HELOC trend is worrisome as often the payments are tied to a variable interest rate,” said Rebecca Oakes of Equifax Canada. “In 2018, when interest rates went up, we saw a drop in credit card payments, especially among consumers with a HELOC. It also led to higher bankruptcies among older consumers with HELOCs.”
The mortgage surge has helped push overall consumer debt to a whopping $2.15 trillion, which is more than the value of Canada’s whole economy.
Scary stuff, but National Bank’s King argues that the impact of rising rates will be less than one might think.
Although most new mortgages are now variable rate, the share of outstanding mortgages with variable rates is only 23%.
Moreover, almost 40% of variable rate mortgages in Canada have fixed payments. That means when interest rates rise, you still make the same mortgage payment, but the repayment of your capital goes down.
“Thus with such loans, as for fixed-rate mortgages, a rise of interest rates may be felt only gradually, as the loan matures,” said King.
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