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Posthaste: Ouch — variable-rate mortgages have cost Canadian homeowners big money

mortgage-interest-rates
mortgage-interest-rates

Remember when variable-rate mortgages were all the rage.

Canadians have traditionally tended toward a fixed-rate, but when the Bank of Canada lowered its benchmark interest rate to 0.25 per cent during the turmoil of the pandemic the popularity of the variable-rate soared.

Even as late as July, 2022, 57 per cent of mortgage quotes on comparison site RATESDOTCA were for variable-rate.

“Variable-rate mortgages only surged in popularity when interest rates were rock-bottom during the pandemic,” said Victor Tran, RATESDOTCA mortgage expert.

Some may now be regretting that choice.

“As the Bank of Canada began hiking the overnight rate to combat rising inflation, this choice has cost these homeowners dearly. But by how much?.”

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To find out RATESDOTCA compared the interest paid on a fixed-rate mortgage with a variable-rate over the past two years.

The study created two profiles for $500,000 mortgages taken out in the low-interest days of July 2021. Bob, as the study names him, took out at five-year variable-rate mortgage at 1.25 per cent, and Lucy took out a five-year fixed-rate mortgage at 1.99 per cent. Both had a 25-year amortization.

All was good until March of the following year when the central bank began raising its rate.

By May of 2022, Bob’s variable rate had risen to two per cent, surpassing Lucy’s fixed.

By December of that year, Bob’s mortgage rate had jumped to 5.25 per cent and he had paid $14,793 in cumulative interest — more than $1,000 more than Lucy had paid on her fixed-rate mortgage.

Fast forward to September 2023. The Bank of Canada has hiked its rate 10 times, taking it to five per cent and the prime rate is 7.2 per cent. Bob’s mortgage rate has risen to six per cent and he has paid 63 per cent more in interest — $13,200 — on his variable-rate mortgage than Lucy paid on her fixed-rate.

In total that’s $33,968 in interest on the variable-rate mortgage and $20,768 on the fixed.

Bob’s monthly mortgage payments, which started at $1,941 a month in March 2022 went to $2,921 by March 2023. Lucy on a fixed-rate has paid $2,114 a month throughout.

The amount going to interest on Bob’s variable-rate loan soared from about $500 a month to more than $2,000, a fourfold increase in less than two years, said the study.

Moreover, the variable-rate borrower has paid $23,579 more in cumulative interest — a 227 per cent jump — than they would have had the Bank of Canada not raised its rate at all.

Mortgagors on variable-rates often have the option of switching to a fixed-rate, or even refinancing their loan. But the stop and go of central bank rate hikes this year has made decision-making more difficult.

“For some, the benefits of variable rates, such as potential lower penalties compared to fixed, and the potential to gain from future rate decreases will be attractive,” said Tran.

That decision depends on the homeowner’s financial circumstances and where lending rates are when a mortgage is renewed, he added.

And sorry to say, there is always the chance the Bank of Canada will hike again.

The bank held its rate this month but left the option open. Hotter than expected inflation data this week did nothing to quiet the nerves.

After the data came out Tuesday, chances of an October hike doubled to 41 per cent with markets fully pricing in another increase by the first quarter of 2024, said mortgage analyst Robert McLister in his newsletter MortgageLogic.news. Cuts were off the table for the next 12 months.

The bank’s deputy governor Sharon Kozicki in a speech the same day said the “ups and downs” of inflation in the past couple of months “are not that unusual,” and there is evidence higher rates are working to cool the economy.

Her comments seemed to suggest policymakers were still comfortable with their decision to stay on the sidelines earlier this month.

But as McLister points out, there is still another inflation report before the bank decides on rates on Oct. 25, and with oil prices surging, it could be another scorcher.

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 Federal Reserve
Federal Reserve

Behold the Federal Reserve ‘dot plot’ — it might not look like much but it can move markets.

The Fed left its key interest rate unchanged yesterday at 5.25-to-5.50 per cent but as the projections in the quarterly chart above show, policymakers still expect one more hike this year. Each dot represents one Fed official including Fed Chair Jerome Powell, amounting to 19 individual anonymous projections. Twelve of 19 on the Federal Open Market Committee expect one more rate hike this year to be appropriate; seven favour holding rates steady.

The dot plot also shows that Fed members expect rates to stay higher for longer as projections for 2024 and 2025 each rose by a half-percentage point.

“The FOMC now expects to hold the policy rate about 50 bps higher by end-2025 than it expected in June,” said CIBC economist Ali Jaffery.

 


  • Alberta releases a report on a potential provincial pension plan
    Global Business Forum and Future of Energy Global Summit begins in Banff, Alberta

  • Today’s Data: Canada’s new housing price index for August, U.S. current account, existing home sales and leading indicators

  • Get all today’s top breaking stories as they happen with the Financial Post’s live news blog, highlighting the business headlines you need to know at a glance.


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The rally in stocks since October lows has many hailing the start of a new bull market, but don’t be fooled, says David Rosenberg.

Even a 20-plus per cent surge can be a normal feature of a protracted bear market.

Rosenberg and his team argue that what markets are experiencing is phase two of an extended bear market, rather than the beginning of a bull run.

Phase three, which involves the long and drawn-out decline to the fundamental lows, still lies ahead of us.

Read more from David Rosenberg

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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com, or hit reply to send us a note.