Prospective homebuyers are racing to get their hands on cheap mortgage debt, many with variable rates. Desjardins' most recent research note indicates they should prepare to pay a lot more in the next two years. When the Bank of Canada raises the overnight rate, homeowners with variable mortgages will have their costs increase, and Desjardins projects these costs to more than double over the nest two years.
Variable rate mortgage costs vary as the lender's prime interest rate fluctuates. The prime rate bases itself on the BoC's overnight rate, which changes with policy. When the overnight rate is reduced, variable rate mortgage have their interest costs fall as well. The same can be said for the opposite. A higher overnight rate leads to higher variable rate associated costs.
These mortgages can be found on the cheap at the moment, but again, that is about to change quite quickly. Most are forecasting hikes to begin next month. Desjardins is expecting for rates to increase from their current 0.25% record low rate to 1.75% by the end of next year - which will significantly elevate the amount of interest that variable rate mortgage borrowers need to pay.
There is a lot of chatter on how higher interest costs will decimate homeowners and households. “Still, the amount of an approved loan is not expected to be immediately affected, since it’s already set at a rate higher than the one offered by the financial institution in accordance with federal government regulations,” explained Hélène Bégin, a senior economist with Desjardins.
Variable rate mortgages have recently surpassed the five year fixed in regards to popularity. This can be attributed to the BoC not increasing rates while inflation pushed other loan prices upward. Many analysts and experts are expecting a slight halt in purchasing as variable costs start to slowly rise.