After 10 interest rate increases; has your variable rate mortgage reached its trigger point?
After 10 interest rate increases; has your variable rate mortgage reached its trigger point?
Over the last 15 years, variable rate mortgages have been substantially lower than fixed rate mortgages. As a result, many Canadians opted for a variable-rate mortgage… but as of March 2022, variable rate mortgages now find themselves higher than fixed rate mortgages, catching many people off guard, and wondering what to do?
What happened? Why are variable rate mortgages higher than fixed rate ones? If lenders are offering variable rates at a higher level than fixed rates, what this tells us is that they think that the Bank of Canada will continue to increase rates.
For a variable-rate mortgage, with a variable payment, the size of the regular payment fluctuates as the prime interest rate changes - if the prime rate goes up, the payment increases to cover the larger interest portion of the mortgage.
For a variable-rate mortgage with fixed payments, the payment amount is calculated at the beginning of the contract, and remains the same for the duration of the loan term. Therefore, if the prime rate rises, the interest portion of the payment increases, and the principal portion decreases, while the total payment remains fixed.
But there is a limit, which is called the “trigger point”.
With the rapid rate increases, variable-rate mortgage borrowers have faced historically large interest rate increases that has made reaching the trigger point a real possibility.
For variable-rate mortgages with fixed payments, the trigger point is when the interest portion of the payment equals the total payment amount, and therefore the principal portion is now zero. If interest rates increase beyond the trigger point, the amount required to cover the interest payment is more than the mortgage payment itself.
Some lenders will automatically increase the mortgage payment so that it continues to cover the interest portion of the payment.
Other lenders allow for negative amortization, where the interest payment is permitted to exceed the total mortgage payment. Principal payments are therefore negative, so the balance owed on the mortgage increases from month to month.
Review your mortgage agreement: carefully review the terms and conditions of your mortgage agreement to understand the options available to you if, and when the trigger point is reached.
Contact your lender: reach out to your lender as soon as possible to explore these possible options. Lenders have varying policies, and may offer different alternatives, so it's best to speak directly with them to understand what choices could be offered to you.
Refinance your mortgage: refinance your mortgage with a new lender or negotiate new terms with your current lender. Refinancing involves replacing the existing mortgage with a new one, potentially at a more favorable fixed rate or with different terms and conditions. It's advisable to shop around, and compare offers from different lenders to secure the best possible option.
Convert to a fixed-rate mortgage: some mortgage agreements will permit you to convert your variable rate mortgage into a fixed-rate mortgage. This option provides will give you stability, and protection to further rate increases.
Consider paying down the principal: if you have the financial means, you could choose to make additional payments toward the principal balance. By reducing the outstanding amount, you may be able to lower your monthly payments or negotiate better terms with your lender.
Seek advice: consulting with a mortgage broker can be beneficial in understanding what is your best course of action.
Clearly, status quo is not the best solution, you need to act promptly and proactively if your variable rate mortgage has reached or is about to reach its trigger point.
If you find yourself in this predicament, contact Fred and Martin Mortgages. We will happily lay out your options. Best of all, it’s free and could save you thousands.
Fred and Martin