50% of variable-rate mortgage holders have reached their trigger rate: BoC By: Steve Huebl
Roughly half of all mortgage holders with static-payment variable-rate mortgages have already reached their trigger rate, according to a new report from the Bank of Canada. That comprises roughly 13% of all outstanding mortgages in Canada, the report found, with that number expected to rise so long as prime rate continues to increase. Two weeks ago, RBC, the country’s largest mortgage lender, reported that 125,000 of its roughly 310,000 variable-rate mortgage holders had reached their trigger rate. This means that the interest portion of their payment had increased so much that the entirety of the payment was going towards interest cost. In most cases, borrowers are required to take immediate action to increase their monthly payments to ensure the interest cost is being covered and that the outstanding balance continues to be paid down. In its report, the Bank of Canada estimates that those who have already reached their trigger rate have had to increase their regular payments by an average of 5%. For households that took out mortgages with a longer amortization (of 30 years, for example) and when mortgage rates were at record lows, their monthly payment would have had to increase by as much as 20%. “The amount by which the required payments need to increase in the future, as well as the share of affected mortgages, will depend on the level at which mortgage rates peak,” the report noted. The BoC report also acknowledged that its analysis didn’t take into account any actions borrowers have already taken to lessen the impact of reaching their trigger rate, such as preemptively increasing their monthly payments. “As such, our findings represent an upper-bound estimate,” the report reads.
What happens when borrowers reach their trigger rates? The report highlighted the main options available when borrowers with static-payment variable-rate mortgages reach their trigger rate. One is that the lender will automatically increase the payment enough to cover the interest portion. “With this approach, if interest rates rise further in subsequent months, the payment will also need to increase to cover the larger interest payment (similar to a variable-rate mortgage with variable payments),” the BoC report explained. Some lenders, however, will allow a negative amortization for a period of time. This means that the principal payments are negative, resulting in the mortgage balance increasing each month in order to cover the interest cost. However, most lenders will reach out to the borrower directly and work out a solution before they reach their trigger rate. This can include increasing the monthly payment, allowing the borrower to switch to a fixed-rate mortgage, refinancing, or having the borrower make a lump-sum payment. The Bank of Canada noted that it has been in regular contact with commercial banks and has found they are “working proactively with their customers who have variable-rate mortgages with fixed payments to determine appropriate solutions on a case-by-case basis.”