08/03/2023
Canada’s economy has so far managed to avert recession and shrug off the fastest rate-tightening cycle in the nation’s history.
And one of the key reasons for that is due to the prevalence of fixed-payment variable-rate mortgages, which experts say have cushioned borrowers from the full impacts of the Bank of Canada‘s rate hikes.
Fixed-payment variable rates, which are offered by banks such as RBC, TD, BMO and CIBC, mean the borrower’s monthly payment remains the same as rates increase, while the portion going towards interest costs rises and the amount going towards principal repayment decreases.
“There’s no question in my mind that these [fixed-payment] variable-rate mortgages are the reason that there is no recession today,” Ron Butler of Butler Mortgage told CMT.
“If every single variable-rate consumer in Canada had an adjustable-rate mortgage like those offered by Scotiabank and National Bank [where payments fluctuate as rates change], we would have a real recession on our hands right now,” he added. “Discretionary spending would have been radically, radically cut back by now.”
Not only have these types of mortgages postponed the payment shock to when these borrowers renew their mortgages, but they’ve actually “magnified the problems down the road,” says Ben Rabidoux of Edge Realty Analytics.
That’s because any mortgages that have gone into negative amortization, where payments aren’t sufficient to cover the principal portion and the mortgage starts growing, will need to see payments increase even higher to account for that difference, Rabidoux explained.
Source: www.canadianmortgagetrends.com
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