Bank of Canada recent interest rate cut has boosted variable-rate mortgage borrowers, prompting commercial banks to lower their prime rates.
Mortgage broker Toma Sojonky reports variable-rate mortgages are gaining traction with clients after falling out of favor during the pandemic, despite the challenging experience for those with these mortgages.
The Bank of Canada 2020 interest rate cut led to a decrease in variable-rate mortgages’ popularity. However, in 2022, rapid rate increases caused higher payments or less principal repayment on these loans.
Borrowers experiencing doubled interest rates experienced increased monthly payments and extended amortization periods, causing a decline in variable-rate loans popularity. The central bank has cut interest rates three times this year.
Bank of Canada governor Tiff Macklem announced a rate cut, predicting further policy rate cuts if inflation eases. Mortgage broker Julie Leduc said clients with variable-rate loans are on their way out, with the benefit of variable rates.
The current variable-rate mortgage rates are higher than fixed-rate mortgage rates due to expectations of future BoC interest rate cuts. If unexpected, the rates won’t decrease, but if expected, the amount charged will decrease, depending on the central bank’s actions.
Lenders are improving discounts to the prime rate for variable-rate mortgages, with discounts approaching 1%. These mortgages are less costly to break than fixed-rate ones, but the amount charged will depend on the central bank’s rollout and the timing of the changes.
Variable-rate loans typically face a three-month interest penalty, while fixed-rate closed mortgages have a greater penalty. Although most clients don’t expect to break their mortgages, half do.