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For many homebuyers over the pandemic, the choice of a variable rate mortgage was a no-brainer. Those loans were heavily discounted compared to fixed rate mortgages, helping buyers to save hundreds of dollars every month.

The shift in preferences is striking. Nearly 30 per cent of outstanding mortgage credit has a variable rate, up from just 18 per cent before COVID-19. And for eight consecutive months, variable rate mortgages have accounted for more than half of new home loans, according to the latest Bank of Canada data.

Now, the central bank is rapidly raising its benchmark interest rate to tame inflation. Most homeowners with a variable rate won’t notice an immediate impact: Their monthly payments are fixed. However, more of that cash will go toward interest and less to paying down principal. Others will see an immediate increase in mortgage costs.

The country’s embrace of variable rates – and broader yet, frothy conditions in the housing market – is leading to some gloomy predictions on Bay Street as lending rates climb.

“Over all, we believe the growing reliance on variable rate mortgages could have a double whammy effect: First, the Bank of Canada rate hikes will be transmitted to Main Street much quicker than in past cycles, hitting disposable income,” Jean-Michel Gauthier, a strategist at Bank of Nova Scotia, wrote to clients on Thursday.

“Second, the hit to the housing market, and thus the wealth effect, will also be much quicker. The path for a safe landing from overheated conditions and unmoored inflation is thus narrow.”

Decoder is a weekly feature that unpacks an important economic chart.

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