Variable-Rate Mortgages Reach Trigger Rate
There was recently an article published in the Financial Post about the fact that variable-rate mortgages are now hitting their trigger rate. The article also talked about how this will effect Canadians financially and what to expect. Before we get into the details let’s learn a bit more about what exactly are variable-rate mortgages and fixed payments. The Bank of Canada explains this very well and what happens when variable-rate mortgages reach their trigger rate.
“In Canada, about three-quarters of variable-rate mortgages have fixed payments. For these specific mortgages, when interest rates move, the amount of the mortgage payment does not change, but the portion going toward interest (rather than principal) is adjusted. But if interest rates increase substantially, these mortgage borrowers may reach a point where their fixed payments cover only interest and not any principal. The interest rate at which this happens is known as the trigger rate. If rates rise above the trigger rate, borrowers may then need to increase their mortgage payment to cover the additional amount of interest. For some households, this payment increase may be unexpected.” — Bank of Canada
It’s been indicated that higher rates are on their way, so what does that really mean for your mortgage rate? Well, if the rate was raised by say 0.50 per cent then you would see a $24 increase per month on your payment. Does that make sense? Let’s learn more about what the Bank of Canada says will happen since we’re now seeing these variable-rate mortgages reach their trigger rate in the Financial Post article.
The Bank Of Canada & Variable-Rate Mortgages
The Bank of Canada Senior Deputy Governor Carolyn Rogers announced that the adjustment to higher interest rates might be difficult for some Canadians with variable-rate mortgages. This was announced at a recent event in Ottawa to a networking group, they indicated that these variable-rate mortgages had an increase since last year.
According to new research by the Bank of Canada, also included in the article by the Financial Post, variable-rate mortgages are accounting to one-third of the outstanding mortgage debt. This is an increase when we compare it to just a few years ago.
The Senior Deputy Governor also said that mortgage costs have already gone up for most Canadians and that they’ll most likely see an increase for more Canadians. In the research paper previously mentioned, the Bank of Canada estimated that there will be around 50 per cent of variable-rate, fixed-payment mortgages that have now reached their trigger rate. Meaning that additional payments are going to be required, which is around 13 per cent of all Canadian mortgages.
“For a variable-rate mortgage with variable payments, the size of regular payments fluctuates as the prime interest rate changes—if prime rates go up, the mortgage payment increases to cover the larger interest component.” — Bank of Canada
The Deputy Governor stated that the risk of Canada’s financial stability is elevated due to the higher levels of household debt, added to it is the rising interest rates. However, the Bank of Canada does expect that the finial system as a whole is going to withstand this time of stress.
“If interest rates increase beyond the trigger rate, the amount required to cover the interest payment will be more than the mortgage payment. Each borrower with a variable-rate mortgage with fixed payments is subject to an individualized trigger rate, which is specified in their mortgage contract.” — Bank of Canada
The VanDinther Team
There’s a lot of information to take in and learn when it comes to different types of mortgages and what they mean. It can be overwhelming at times, that’s why we want to keep our clients informed. If you have any questions please reach out to us.
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