Variable mortgage rates on the rise?

New Canadian mortgage borrowers have paid the highest variable mortgage rates in at least half a decade, according to an analysis by Better Dwelling.

The average variable interest rate for new mortgages hit 3.89% in September, up 1.57% from a month before. However, the difference is significantly more noticeable on an annual basis. In fact, Canadians are paying roughly 25% more for variable mortgages last year than the year before.

"This is the highest the rate has been in the central bank's recent records," said Better Dwelling analyst Daniel Wong.

Variable rates rose at a substantial pace last year, with the 12-month growth to September being higher than anything recorded before May 2019.

"The rate itself, is also the highest going back at least four years, but likely goes back much further," Wong said.

Typically, the changes in interest charges depend on the lenders' prime lending rates. This means that when interest rates go down, payments from borrowers go toward paying off their principal. In contrast, their payments cover interest costs when rates rise. Wong said variable loans offer the lowest interest rates when signing up. However, the movement of the official cash rate influences variable rates.

Fixed-rate mortgages, on the other hand, charge higher costs at the onset. However, fixed rates, as the name suggests, remain the same despite the movement in the official cash rate.

"Canadians are paying more for variable rate mortgages than they have in years. Most of this is due to the widespread belief that rates will fall, as the economy slows," Wong said.

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