Variable-rate mortgage disadvantageous to many Canadians

Recent data from the Bank of Canada (BoC) showed that the estimated variable mortgage rate rose by more than a fifth, causing Canadians to pay more to their banks, as well as experience difficulty in cutting their debts.

According to a report by Better Dwelling, the cost of a variable-rate mortgage has been tracking upwards across the country. The typical variable rate was estimated to have hit 2.72% on Dec. 6, marking a nearly 2.25% increase from a month before. The rate is now more than 22.52%, which is higher than it was in 2017.

In a variable-rate mortgage setup, a borrower can have their interest calculated monthly, based on the lender’s prime rate. Borrowers pay a fixed sum monthly, but the amount turned over to the principal differs.

Canadian borrowers are taking the brunt of increased interest rates. Variable-rate mortgages used to work in favor of borrowers. As rates decreased, these borrowers were able to generate higher-than-expected principal contributions. Currently, though, variable rates are increasing, making it hard to pay off loans.

“A borrower at the estimated rate who borrowed last year would see their interest payments rise 22.5% higher,” Better Dwelling said. “If they continue to make the same payments, the amount paid to principal would fall by about 6.6%. At the end of their variable term, the bank finds themselves with more cash. The borrower finds themselves with less of a dent in their mortgage.”

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