A recent report by Rates.ca suggests those with variable rate mortgage have paid thousands more in interest since rate hikes by the Bank of Canada began.
The company compiled data looking at the difference between fixed and variable rate mortgages, using an example of a five-year insured mortgage of $500,000 taken out in July 2021. The person with a fixed rate had a rate of 1.99 per cent, while the variable-rate mortgage was at 1.25 per cent.
Variable-rate mortgages are tied to the bank’s key rate and will rise or fall accordingly. The fixed does not change.
Jump to September 2023 and many rate hikes later, and the person with a variable rate would have paid about 63 per cent more in total interest than the one with a fixed rate.
To look at it another way, the homeowner with a variable rate mortgage would have paid 227 per cent more in interest than if rates hadn’t spiked.
Following 10 rate hikes, Rates.ca found that the variable rate path cost $23,579 more, as of this month, in cumulative interest compared to what would’ve been paid if the rate had remained unchanged.
As the overnight lending rate increased, it took only six months for the homeowner with a variable rate to exceed the amount of interest paid monthly by person with a fixed rate mortgage.
Rates.ca mortgage and real estate expert Victor Tran said while circumstances are different for every person, the report shows what the average Canadian has been facing with a variable rate mortgage.
“It’s not exactly what they bargained for. You know, they’re paying a lot more now,” he said in an interview with Global News. “Lots of regret in the market as well. You know, maybe they should have went for the fixed rate when that option was given to them.”
He noted, however, that there isn’t blame to be placed because it was the “best decision” made based on information presented at the time, adding it did not appear that the Bank of Canada was going to hike rates so quickly.
Variable or fixed: which should you choose?
Canadians can only wait and see if the Bank will lower rates in the near future, with some economists suggesting the current tightening cycle has peaked.
Tran says it can be difficult to know whether people should hold onto their variable rate mortgages or potentially change to fixed.
“It really depends on the individual circumstances, but also depends on the number of months or years they have left in their variable rate term,” Tran said. “Depends on the outstanding balance, depends on the short-term and long-term goals of the customer as well.”
Eitan Pinsky, owner of Pinsky Mortgages in B.C., said customers who took a variable rate mortgage are facing higher and unpredictable costs, with some paying tens of thousands more.
For some people, the variable rate is still worth the risk.
There can still be a benefit to choosing variable rates, Pinsky said, but it depends on the person. Some risk-seeking buyers are OK with such a mortgage, he said, or those who are planning to make the purchase into a rental property.
Are there future benefits to a variable rate?
Some people who choose a variable-rate mortgage will be better off in the years to come, Pinsky says — but it all comes down to timing, and playing the long game.
“I think if somebody got a variable rate in 2021, 2022, before the rates went up, they would not be better off even if the rates go down in 2024, 2025, because we’ve had such a long period of being a higher rate than what they’ve gotten at the fixed rate,” he said.
“If somebody were to get a variable rate right now I think there’s a very good chance, 50-50 or even more, you’re going to be in a better position getting that variable rate.”
While rates are high now, should they fall in the coming years, those with a variable rate mortgage would end up paying less monthly than those who locked into a fixed rate at the peak.
Pinsky said a beneficial part of variable rate is it can be locked into a fixed rate at any time, so those with mortgages have some say in getting off the rate roller coaster.
Though variable rates could be beneficial for some people in the future, it is unlikely the rock-bottom rates seen in recent years are likely to reoccur soon. As a result, Tran said fixed rates are seeing a surge in popularity.
“Right now the fixed rate 100 per cent by far is the most popular choice because people simply want certainty, they want stability,” Tran said. “The variable rates are still very volatile and people are afraid of fluctuating payments.”
Fixed-rate mortgages are a benefit for those wanting stability as variable mortgages continue to fluctuate, Pinsky said.
“Fixed rates are that decrease in headspace,” Pinsky said. “How much room you need to take in your head with the variable is quite a lot … I think we’re going to have fewer variable rates going forward, just primarily because of people’s mental health.”
Pinsky believes variable rates will come back in popularity, but it will take time as it will rely on the Bank of Canada lowering rates — a move he doesn’t expect will happen quickly.
When Canadians are trying to determine what mortgage to get, however, both Tran and Pinsky say it’s important to speak with mortgage professionals and other experts like brokers to determine what is your best path.
“(They) will be able to assess your situation. Your situation is unique whether or not you’ve got a variable and adjustable or a fixed rate. It all depends on your specific situation,” Pinsky said.