A recent report from Rates.ca suggests that holders of variable rate mortgages have paid thousands of dollars extra in interest since the Bank of Canada began rate hikes.
The company compiled data examining the difference between fixed and variable rate mortgages, using the example of a five-year, $500,000 insured mortgage taken out in July 2021. The fixed rate holder had a rate of 1.99 percent, while the variable-rate mortgage rate was 1.25 percent.
Adjustable rate mortgages are linked to the bank’s prime rate and will increase or decrease accordingly. The fixed does not change.
Fast forward to September 2023 and many rate hikes later, the variable rate holder would have paid about 63% more in total interest than the fixed rate holder.
In other words, the holder of an adjustable rate mortgage would have paid 227 percent more interest than if rates had not increased.
After 10 rate hikes, Rates.ca found that the variable rate path cost $23,579 more, as of this month, in cumulative interest than what would have been paid if the rate had remained unchanged.
As the overnight lending rate increased, it took only six months for the variable rate holder to exceed the amount of interest paid monthly by the fixed rate holder.
Rates.ca mortgage and real estate expert Victor Tran said that while each person’s circumstances are different, the report shows what the average Canadian faces with an adjustable-rate mortgage.
“It’s not exactly what they bargained for. You know, they pay a lot more now,” he said in an interview with PKBNEWS. “A lot of regrets on the market as well. You know, maybe they should have gone with the fixed rate when that option was offered to them.
He stressed, however, that there was no room for blame because it was the “best decision” made based on the information presented at the time, adding that it did not appear that the Bank of Canada was going to raise rates that quickly.
Variable or fixed: which to choose?
Canadians can only wait and see if the Bank will cut rates in the near future, with some economists suggesting the current tightening cycle has reached its peak.
Tran says it can be difficult to know whether people should keep their adjustable-rate mortgages or possibly move to fixed-rate mortgages.
“It really depends on individual circumstances, but it also depends on how many months or years they have left in their variable rate term,” Tran said. “It depends on the outstanding balance, it also depends on the customer’s short-term and long-term goals.”
Eitan Pinsky, owner of Pinsky Mortgages in British Columbia, said customers who took out an adjustable-rate mortgage face higher and unpredictable costs, with some paying tens of thousands more.
For some people, the variable rate is still worth the risk.
There may still be an advantage to choosing variable rates, Pinksy said, but it depends on the person. Some risk-seeking buyers are OK with such a mortgage, he said, or those considering a rental property.
Are there any future benefits at a variable rate?
In fashion now
Some people who choose an adjustable-rate mortgage will fare better in years to come, Pinksy says – but it’s all about timing and the long-term game.
“I think if someone had a variable rate in 2021, 2022, before the rates went up, their situation would not be better even if the rates went down in 2024, 2025, because we had a very long period of time where we were at a higher rate than what they got at the fixed rate,” he said.
“If someone were to get a variable rate right now, I think there’s a very good chance, 50-50 or even better, that they would be in a better position to get that variable rate.”
Even if rates are high now, if they fall in the coming years, those with an adjustable rate mortgage will end up paying less monthly than those who opted for a fixed rate at the highest level.
Pinsky said an advantage of the variable rate is that it can be locked in at a fixed rate at any time, so mortgage holders have a say in getting off the rate roller coaster.
Although variable rates may benefit some people in the future, it is unlikely that the lowest rates seen in recent years will be repeated anytime soon. As a result, Tran said fixed rates are seeing a resurgence in popularity.
“Right now, the 100 percent fixed rate is by far the most popular choice because people just want certainty, they want stability,” Tran said. “Variable rates are still very volatile and people are afraid of fluctuating payments. »
Fixed-rate mortgages are an advantage for those looking for stability, as adjustable-rate mortgages continue to fluctuate, Pinsky said.
“Flat rates equate to less free space,” Pinsky said. “The space you have to take in your head with the variable is considerable…I think we’re going to have fewer variable rates in the future, mainly because of people’s mental health.”
Pinsky believes variable rates will return to popularity, but it will take time because it will depend on the Bank of Canada lowering rates – a move he doesn’t expect to happen quickly.
However, when Canadians are trying to determine which mortgage to get, Tran and Pinsky say it’s important to speak with mortgage professionals and other experts like brokers to determine the best path forward.
“(They) will be able to a*sess your situation. Your situation is unique, whether or not you have a variable and adjustable rate or a fixed rate. It all depends on your specific situation,” Pinksy said.
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