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

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

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Many Canadian mortgage borrowers regret falling into the low interest rate trap. bank of canada (BoC) data show a surge in borrowers opting for floating rates over the past few years. At the time, mortgage borrowers could have saved a few points over their fixed-rate peers. Interest costs are currently on their steepest rise in history, and they are rising further.

Share of uninsured variable rate mortgages doubled since March 2020

Variable rate mortgage debt surged in the uninsured credit segment. Nearly two-fifths (39.8%) of the dollar in this segment had floating rates in September. That’s up from 29.4% last year and just 19.1% in March 2020. Canadians generally prefer the stability of fixed interest rates. However, you can see how quickly this has changed over the past few years.

Canadian mortgage borrowers caught in a low interest rate trap

Percentage of outstanding variable rate mortgages.

Source: Bank of Canada; Better Housing.

More than one-fifth of insured mortgage debt is variable rate, up more than 50% from last year

Just over a fifth (21.2%) of insured mortgage balances in September had floating rates. This is up significantly from 16.0% last year and up from the January 2021 period low of 13.3%.

I thought Canadians could save money, but I was really wrong

The main reason for moving to floating rate products was the savings offered. That changed really quickly. Average interest expense on outstanding uninsured debt reached 4.86% in September. This is a significant shift from an all-time low of 1.87% last February. These borrowers are paying more than twice as much.

Canadian variable-rate mortgage borrowers face surge in interest costs

The average interest rate paid by mortgage borrowers on a floating rate.

Source: Bank of Canada; Better Housing.

A similar trend is observed for insured borrowers. The average interest rate in September he reached 4.45%, up from his low of 1.54% just a few months ago. It follows a similar trajectory, albeit slightly cheaper than the uninsured rate.

Again, most Canadians prefer the predictability of fixed interest costs. However, the gap between variable and fixed rate mortgages has proven too appealing for many. So much so that the share of mortgages in the variable rate market has skyrocketed.

As a result, the purchasing power of many consumers is about to evaporate soon. The BoC has clearly stated that the interest rate should be even higher than the current rate. With the immediate transmission of costs, expect the pain to get even worse in the coming months.

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