While cheaper, variable-rate products are fundamentally more volatile, especially in the current economic climate
While variable-rate mortgages are seeing increased popularity due to the growing cost of fixed-rate options, a markets observer cautioned that variable products are an unreliable choice in an age of economic flux.
In a February 7 column for The Huffington Post Canada, business editor Daniel Tencer wrote that while variable mortgages are indeed cheaper, their risk lies in that their rates “[move] up and down constantly with market interest rates, changing interest payments.”
“With house prices soaring in some Canadian markets, homebuyers are desperate to get as large a loan as they can. But that is precisely the reason they should stay away from variable-rate mortgages: If you're indebted to the hilt, you can't afford a surprise increase in your debt,” Tencer explained.
The analyst added that getting a variable-rate product would mean paying higher interest at the onset—an increasingly likely scenario considering the current state of interest rates.
“Central banks’ rates have been on a downward trajectory for decades, from around 20 per cent in the early 1980s to just above zero these days,” Tencer stated. “In recent years, many who took variable rate mortgages won on the bet, because interest rates were falling, and their payments fell with them. But that's all over now. Mortgage rates can't move down much at all, but they have plenty of room to move up.”
Together, these factors make the present era “the worst possible time to get a variable-rate mortgage.”
“At a time when Canadian household debt is already at very risky all-time highs, pushing mortgage borrowers to take on a more volatile and unpredictable mortgage can only be described as irrational and irresponsible.”
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