Half of variable-rate and fixed-payment mortgages hit trigger rate, Bank of Canada says

The Bank of Canada said half of all homeowners with variable rate and fixed payment mortgages reached their trigger rate by October 2022. (Photo by Creative Touch Imaging Ltd./NurPhoto via Getty Images)

About half of homeowners who have a variable-rate mortgage with a fixed payment had reached their trigger rate by October 2022, according to a research note released Tuesday by the Bank of Canada.

The note also warned that the number could rise to 65% of homeowners if the central bank raises its key rate by half a percentage point at its next meeting in December, as many Bay Street economists expect.

Most variable rate mortgages in Canada have static monthly payments, which means the payment will stay the same even if interest rates change. Trigger rates are activated when the interest portion exceeds the payment itself, and it’s a trend that has become widespread amid the sharp rise in interest rates this year.

Once a homeowner hits their trigger rate, the lender typically gives them several options, including paying a lump sum for the loan to reduce the principal, increasing their monthly payment to cover the entire part of the interest or the extension of the amortization period.

A small number of lenders will also allow negative amortization to occur, where the mortgage increases from month to month.

The Bank of Canada said half of all homeowners with variable-rate, fixed-payment mortgages reached their trigger rate by October 2022.

Bank of Canada, Staff Analytical Note 2022-19

The Bank noted that its calculations did not take into account homeowners who have already taken steps to reduce their mortgage and align their amortizations.

Separately on Tuesday, Bank of Canada Senior Deputy Governor Carolyn Rogers said in a speech that the central bank is monitoring the impact of rising borrowing costs on homeowners.

“One group of Canadians who will find this adjustment painful are those who have recently purchased a home, potentially stretching their budget to do so, and have chosen an adjustable rate mortgage,” Rogers said.

“It’s not a large share of households, but it’s larger than it would have been based on historical trends.”

Variable mortgage rates had become very popular in recent years, but particularly during the pandemic, with interest rates at historic lows. In the note, the Bank of Canada says these types of mortgages accounted for about a third of all outstanding mortgage debt, up from about 20% at the end of 2019.

The Bank said the median increase in payments for mortgages that had reached their trigger rate was likely around 5%.

Michelle Zadikian is a Senior Reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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