'Rolling the dice': Expert warns on variable mortgage rate risks
BNN Bloomberg
It might be tempting for homebuyers to choose a cheaper variable mortgage rate over a fixed rate right now, but one mortgage expert warns those buyers might be “rolling the dice” – especially if the Bank of Canada is forced to hike its benchmark interest rate sooner than expected.
It might be tempting for homebuyers to choose a cheaper variable mortgage rate over a fixed rate right now, but one mortgage expert warns those buyers might be “rolling the dice” – especially if the Bank of Canada is forced to hike its benchmark interest rate sooner than expected.
RATESDOTCA Managing Editor Rob McLister pointed out in an interview Wednesday that five-year fixed mortgage rates have been rising, leaving a sizeable gap of around 80 to 90 basis points compared to variable rates, which move in tandem with the Bank of Canada’s benchmark policy rate.
Historically, homeowners have flocked to fixed rates, since their payments will be known for the term of the mortgage, but that trend has been reversing recently and variable rate mortgages have gained in popularity.
“A lot of people are just taking variable – you know, just rolling the dice,” he said. “It’s kind of like picking up a penny in front of a steaming locomotive. I think the Bank of Canada might be forced to act more aggressively than a lot of people are expecting – and that 75- to 100-basis point advantage in a variable rate can disappear very quick,” he said.
Businesses and consumers have absorbed another month of high inflation as the latest Statistics Canada data show consumer prices rose 4.4 per cent in September from a year earlier, marking the biggest jump since February 2003.
While Bank of Canada Governor Tiff Macklem has repeatedly said he believes the spike in prices will be temporary, Scotiabank Economist Derek Holt disagrees and is predicting the Bank of Canada will need to hike rates as many as eight times by the end of 2023, bringing the benchmark rate to 2.25 per cent.
