Banks are contacting many customers with variable mortgages to let them know they are reaching their trigger rate, reporting higher monthly costs for a growing number of homeowners and a longer repayment period.
Soaring interest rates penalize homeowners with variable mortgages, which had been popular in recent years due to their previously low rates.
The vast majority of Canadian variable mortgages have fixed payments, meaning payments stay the same even when interest rates rise moderately. Instead of a payment increase, the portion of your payment that goes to interest changes, as does your amortization period.
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But as interest rates have risen dramatically this year as central banks battle inflation, variable mortgages are starting to hit what’s called the trigger rate – the rate at which the monthly payment wouldn’t be enough to cover. cover the interest due. Usually, this means homeowners need to increase their mortgage payments, and those increased payments will only cover the interest instead of eating into the principal of the loan.
Most people who took out variable rate mortgages more than two years ago wouldn’t have thought about their trigger rate, said Ron Butler, a broker at Butler Mortgage Inc. After all, interest rates interest have generally declined. trend for more than a decade.
Mr Butler and other industry participants said banks had started issuing notices to customers whose variable mortgages reached the trigger rate.
TD Bank said it proactively monitors customer profiles and seeks to find appropriate next steps for a borrower when the trigger rate is exceeded.
“While the proportion of clients who will hit the trigger rate will increase as interest rates rise, clients are not required to act when they hit the trigger rate,” said Olympia Baldrich, vice-president. President of Home Secured Loans and TD Bank Group, in a report.
“There are several options for them…we will work with the customer in this case to find the appropriate solution based on their specific situation.”
Ms. Baldrich added that many borrowers TD contacted chose to increase their payments.
In a recent report, Dominique Lapointe, global macrostrategist at Manulife Investment Management, said the majority of new mortgages between July 2021 and June 2022 were variable rate mortgages, and these borrowers are at risk of severe shock. sticker when they renew their variable mortgage.
Lapointe said most homeowners can survive without too much financial pressure right now, but the real cause for concern is if interest rates stay high for two or more years and homeowners don’t make progress on the amount of their loan during this period.
He added that borrowers who currently have a 30-year amortization rate would be particularly exposed to unaffordable payments in this scenario, as their payments would theoretically increase significantly to maintain their repayment schedule when they renew their mortgage.
“That’s what worries us the most,” said Mr. Lapointe.
“Systemic risk will really arise if the Bank of Canada has to keep rates high for longer than we think.”
On the bright side, the immediate impact on many homeowners’ monthly payments is likely to be modest.
For example, Butler says a homeowner who took out a mortgage in 2021 with a $2,000 payment and 25-year amortization would have had $440 towards an interest rate of 1.45%. This same consumer would have already reached their trigger rate and would pay $2,021, although it would all go toward interest.
But with another interest rate hike from the Bank of Canada slated for next week after the overnight rate was raised to 3.25% last month, that payment could increase by hundreds. The costs would only increase further with further rate hikes by the Bank of Canada.
“Some analysts have suggested that a 5% overnight rate is not impossible,” Butler said. “It’s stressful, it’s very stressful.”
Mr Butler advised people with variable mortgages to ask their lender about all the options they might have in a high-interest landscape, which varies from provider to provider. Some providers allow your mortgage to increase up to 80% of your home’s value, which could be an option for people who can’t afford higher payments.
He added that some consumers saw interest hikes coming and switched to fixed rate mortgages a year ago, but that ship has long sailed for people looking to be proactive because they would find themselves stuck. in some of the highest rates for over more than a decade.
That’s a view shared by Mr. Lapointe, who noted that “rates arguably have more room to go down than up over the next few years.”
For homeowners feeling stressed by their variable mortgages, Lapointe said now is a good time to consider increasing payments or making lump sum contributions if possible to reduce your capital before higher rates hit. come into force.
Nasma Ali, founder of One Group Toronto Real Estate, said clients and members of her community are scared of what’s next. This fear is compounded by the fact that there is no easy way out of home ownership right now, with the housing market weak. The bloated rental markets in many major cities are also not a financially attractive option right now.
For now, Ms Ali said there was no sense of panic among owners – she thinks many people will take the next few months to consider their options as the interest rate environment evolves. However, with rates set to rise, she thinks more people could be selling by next year.
“Next year is going to be an interesting year and it’s not going to be pretty for a lot of people,” Ms Ali said.