Rising rates, plunging home prices put a pinch on variable mortgage holders

Amid cooling housing market, many new homeowners are experiencing signs of buyer's remorse

Rising rates, plunging home prices put a pinch on variable mortgage holders

Homeowners with variable-rate mortgages may be squeezed even more next week, according to mortgage brokers, as the Bank of Canada is generally expected to boost the country's benchmark lending rate as part of its ongoing attempts to stem fast increasing inflation.

The rate rise is set for December 7, and if it occurs as expected, it will be the eighth since March.

According to the central bank, variable rate mortgages, in which payments are tied to the rise and fall of the country's benchmark lending rate, account for almost a third of all mortgage debt in the country.

During the COVID-19 epidemic, they were more favoured as house values rose and interest rates were near zero, making many purchasers' payments more affordable than if they had chosen a fixed-rate mortgage.

"Should I lock in? That's the million-dollar question right now, and it's a tough question to answer," Dani Hanna, a mortgage broker and owner of the Mortgage Firm in London, Ontario, told CBC News.

"The reason the rates have been increasing so quickly is because of inflation. Inflation is through the roof. We could see that start to subside in the next couple of months, and if that starts to subside, could we see interest rates go down? Possibly," he said. 

Therefore, some mortgage brokers are hesitant to urge their clients to lock in a fixed rate.

If inflation begins to decelerate, the central bank may reduce interest rates again, dragging payments down with it. According to Hanna, if a homeowner switches to a fixed rate, they may end up paying much more than if they retained their variable rate.

Part of the explanation is that many borrowers are approaching the trigger rate, the point at which the interest part of their payment exceeds the principal.

According to recent BoC research, half of all variable-rate mortgages in Canada reached their trigger rate last month.

Many financial analysts like Mark Mitchell, a London and Ontario mortgage broker with Real Mortgage Associates, predict a raise of at least 50 basis points on December 7, placing the Bank of Canada prime rate at 4.25%.

He predicts there will be more, leaving homeowners who choose variable rate mortgages in an even worse situation.

Mitchell advises borrowers with variable rate mortgages to lock in now to avoid further agony later, but if a customer can't afford to lock in because the rates are too high, he suggests selling.

Many individuals considering selling a house they can't retain are considering renting, according to Mitchell, but they won't find much solace there because rental rates climbed alongside real estate prices during the pandemic's hysteria.