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In the Wake of New Lending Rules, Variable-Rate Mortgages are Becoming More Popular in Canada

15 February 2017

Ottawa’s new mortgage guidelines have made it harder for Canadians to qualify for the five-year fixed rate mortgage. Luckily, variable rates continue to offer more savings.

Canada’s housing market continues to defy the odds, but stricter lending guidelines from the federal government means more people are opting for variable-rate mortgages. Luckily, variable rates are becoming more attractive by the day.

Variable Rates Are More Affordable – For Now

Variable rates, which move in lockstep with the prime rate, have been creeping lower in recent months. Fixed rates, on the other hand, have been moving in the opposite direction. The spread appears to be widening, making variable rates more attractive.

As of February 10, the lowest available fixed-rate on a five-year mortgage was 2.42%. That’s an increase of 33 basis points from November 1, when the lowest rate was 2.09%.[1]

Meanwhile, the lowest five-year variable rate is currently 1.88%, and just last week was at 1.83%. While both rates are very low by historical standards, opting for a variable-rate mortgage means big savings.

Although mortgage agents are getting more calls about variable rates, not everyone is prepared to take the plunge. Variable rates have generally been less attractive for risk-averse Canadians since, as the name implies, they can change at any time. This contrasts with fixed-rate mortgages, which guarantee the same monthly payment for the duration of the loan. Experts say this will soon change as more Canadians are turned away from fixed-rate mortgages due to the growing cost of qualifying for these loans.

Fixed-Rate Mortgages Subject to Stress Tests

Since October, the Canadian government has required that all borrowers who opt for a five-year fixed rate to undergo a stress test that ensures they will be able to repay their loan. This same test already applies to borrowers with variable rate. Ottawa’s new mortgage rules will likely impact first-time buyers more than anyone, but even government economists say home sales in general could fall as much as 8% over the medium-term.

From a historical perspective, borrowers who have opted for variable rates have won the bet, seeing as how the Bank of Canada (BOC) has lowered interest rates from around 20% in the 1980s to just above zero today. What’s more, the BOC has made it abundantly clear it is willing to lower rates even further to keep the economy growing modestly. Stephen Poloz, the central bank’s governor, said last October that he came close to voting for another cut.[2] The BOC may have bought some time now that the economy appears to have turned a corner.

Nevertheless, most analysts seem to agree that the central bank is more likely to cut interest rates before they raise them again. While this bodes well for homeowners in general, it raises concerns about skyrocketing debt.

Rising Debt

The Parliamentary Budget Officer reported last year that Canadian households owe $171 for every $100 in disposable income. That’s the highest level in the G7. A separate study from Calgary-based MNP LLP last year also showed that more than half of Canadians are $200 away from being completely overwhelmed by debt.

The BOC has repeatedly warned about the dangers of rising household debt, calling it one of the biggest risks facing the economy. In its December report, the central bank said mortgage rates are rising in response to government and regulatory restrictions, as well as rising long-term bond yields.[3] In an environment that does not permit interest rate increases, the BOC appears to be relying on tighter lending guidelines to stem the growth of household debt.


[1] Erica Alini (February 3, 2017). ‘Why variable-rate mortgages are becoming more attractive to Canadians.” Global News.

[2] Gordon Isfeld (October 19, 2016). “Bank of Canada was close to cutting interest rate Wednesday, Stephen Poloz reveals.” Financial Post.

[3] Barbara Shecter (December 15, 2016). “Canadians’ rising household debt key risk to economy, Bank of Canada warns.” Financial Post.

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