Canadian homeowners are demonstrating a fascinating psychological pattern, prioritizing immediate financial benefits over potential future risks as variable-rate mortgages experience a dramatic resurgence across the country.
The Surge in Variable-Rate Adoption
Recent data reveals a striking trend in mortgage selection among Canadian borrowers. At Dominion Lending Centres Group, the nation's largest mortgage originator, 47 percent of prime borrowers opted for variable-rate mortgages in November. This represents a substantial increase from the 25.6 percent recorded just three months earlier in August.
The driving force behind this shift appears to be the current rate differential. Typical variable rates currently offer approximately 25 basis points lower than most fixed-rate alternatives. While this spread seems modest, it's proving sufficient to attract significant numbers of borrowers back to variable products after years of fixed-rate dominance.
Economic Uncertainty and Consumer Psychology
Many Canadians choosing variable rates appear to be betting on economic weakness ahead, despite recent positive economic indicators. Friday's 2.6 percent GDP growth exceeded expectations, though some analysts question the report's reliability.
Meanwhile, financial institutions are sounding cautionary notes. National Bank Financial recently stated that the Bank of Canada has indicated its easing cycle is over, suggesting the next rate movement could potentially be upward rather than downward.
Mortgage shoppers seem unconvinced by this outlook, anticipating greater economic challenges in 2026 as the United States renegotiates the Canada-United States-Mexico Agreement (CUSMA). This critical trade negotiation could see former President Donald Trump dictating terms or even threatening non-renewal of the agreement entirely.
Historical Patterns and Academic Research
Many mortgage advisors reinforce variable-rate choices by citing landmark studies from York University professor Moshe Milevsky, which indicate that variable rates outperform fixed alternatives more than 77 percent of the time, depending on specific assumptions.
However, experts caution against relying on outdated research, particularly a frequently cited 2001 study suggesting variable rates win nearly 90 percent of the time. This older analysis fails to account for current market conditions, including different fixed-variable spreads, our position in the rate cycle, and contemporary structural inflation risks such as U.S. trade policy and fiscal excess.
The current environment echoes patterns seen in 2021-2022, when similar dynamics led to a surge in variable-rate origination immediately before the Bank of Canada initiated its 475 basis point tightening cycle. National Bank Financial notes that this time, as then, they don't see much downside for mortgage rates.
Optimism bias continues to drive variable-rate adoption, with many borrowers assuming rates probably won't rise significantly. This psychological tendency becomes more pronounced as bond yields increase, making fixed mortgages increasingly expensive relative to their variable counterparts.
For Canadians considering their mortgage options, spreading risk across an unpredictable future may represent a logical solution, particularly for those expecting to carry a mortgage balance through various economic conditions. The fundamental question remains whether guaranteed short-term savings justify potential long-term risks in an increasingly uncertain economic landscape.
