Mortgage strategist on the associated risks
With signs of interest rates peaking and set to decline, one might expect a resurgence in popularity for variable rate mortgages. However, a commentary by mortgage strategist Robert McLister has highlighted the persistent fear among borrowers regarding these financial products.
Despite favourable conditions, many remain reluctant to embrace variable rate mortgages, preferring the perceived safety of fixed-rate alternatives.
Fear of the unknown
The primary driver of this reluctance is fear, McLister highlighted. Even though the Bank of Canada has implemented two rate cuts and further reductions seem likely, borrowers remain apprehensive.
The scars left by recent rate hikes are still fresh, particularly for those who were financially strained by the unpredictable swings in variable rates. McLister pointed out that, while history suggests a downward trend in rates following such peaks, memories of the 1970s and early 1980s—a time of extreme rate fluctuations—linger, despite the significant differences between then and now.
Qualification challenges
Another barrier is the stringent qualification process imposed by the Canadian government’s stress test, which makes it more difficult to qualify for a variable rate mortgage compared to a fixed one. As McLister explained, potential borrowers must prove they can afford a rate significantly higher than the actual rate offered, making it challenging for those with tighter finances to opt for a variable mortgage.
This policy, intended to ensure borrowers can withstand future rate increases, inadvertently pushes many into fixed-rate mortgages, even when variable rates might be more beneficial in the long term.
Sticky payments
The structure of most variable-rate mortgages also plays a role in their unpopularity. Many of these mortgages come with fixed payments, meaning that even if the interest rate decreases, the borrower does not see an immediate reduction in their monthly payments. Instead, the term of the mortgage is shortened.
For many, this lack of immediate financial relief is unappealing, particularly in an environment of high living costs. As McLister noted, while some banks do offer products where payments decrease with falling rates, these are not widely available, further discouraging potential variable-rate borrowers.
An educated gamble
Despite these concerns, McLister argued that well-qualified, risk-tolerant borrowers should consider the benefits of a variable rate mortgage.
Market predictions have suggested a significant decline in rates over the coming years, which could result in considerable savings for those with variable-rate mortgages. However, the unpredictability of the market and the unique risks of the current economic climate mean that betting on variable rates is not without its probabilities.
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