Canada’s Variable Rate Mortgage Borrowers Aren’t In For The Mayhem Media Expects

Canadian interest rates are soaring, and that has a lot of focus on variable rate borrowers. National Bank of Canada (NBF) economists feel it’s an overhyped media narrative though. The bank ran the numbers for “trigger rates” — the point where variable payments rise in cost. Their estimates show its unlikely rates will rise enough to hit the trigger level.

Canadian Variable Rate Mortgages Don’t Often See Payments Rise

A variable rate mortgage is one where the cost of interest isn’t fixed, but changes with the market. While the cost of interest can rise or fall, borrowers don’t often see their payment change. In Canada, they typically continue to pay the same and more or less goes to principal, depending on rates.

There’s a relatively rare exception that can force a renegotiation — the trigger rate. Lenders and borrowers agree that if interest rises too sharply, they’ll renegotiate. If too little cash is being applied to interest, lenders can up the size of payment. It doesn’t sound like a fun situation, but the borrower has tools if it’s too high for them to handle. For example, extending the amortization of the loan is one way to lower payments. Albeit, at the cost of paying more interest.

Canada’s Media Is Over Triggered When It Comes To Trigger Rates

Experts have been making the media rounds warning about trigger rates. Impending doom is just around the corner for these borrowers, apparently. NBF economist and rate strategist Daren King disagrees with the take.

“… we are not there yet even if the media talks about it a lot in the wake of the jumbo policy rate increase by the BoC…” said King.

Canadian Variable Rate Mortgage Borrowers Unlikely To Hit The Trigger Rate

King ran the numbers looking at the highest (Q3 2019) and lowest (Q4 2021) rates over the past 5 years. Using the forecast terminal rate of 3.25%, they estimated the trigger rate for borrowers at both ends. Neither segment is expected to reach that level this year. It also happens to be the peak forecast this cycle, so potentially, it may never happen.

“That said, if those mortgage holders could avoid a surprise increase in their payment in the short-term, a significant increase awaits them at the time of renewal if the amortization schedule is respected,” warns King

If the trigger rate is reached, it would be one of the few times variable rate mortgages weren’t a winner. Benefiting from 30 years of generally falling rates was a win for these borrowers. That’s before one factors in price appreciation.

14 Comments

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  • AtroubledCanadian 1 week ago

    Is NBC only expecting another 75 bps increase in interest rates through the rest of 2022, or am I understanding this incorrectly?

    If that’s the case, my goodness they’ve got some optimistic forecasters.

  • Chris Hotte 1 week ago

    What are they going on about? My payment went up $100 for every 0.5% hike immediately for a mere $250K mortgage.

    • Trader Jim 1 week ago

      You would be one of the exceptions of people that have a variable rate product where the payment adjusts as rates rise. RBC exec said the other day those products are rare, so they aren’t worried about their customer seeing an immediate risk.

  • T 1 week ago

    This article is so wrong. There are going to be three more interest rate changes this year alone. Sept 7 is another 75 points. One more rise from that and your graph shows that everyone in Q4 2021 would get renegotiated.

    Some people are already getting these phone calls by the way. Please educate yourself before spewing nonsense.

    • Mortgage Guy 1 week ago

      They priced in 3 more hikes @ 3.25% overnight rate. Averages mean some people will be worse off and others less. In any case, you were all stress tested sufficiently for it so the share of people who will actually be in trouble is slim to none. Less than 1%.

      • AtroubledCanadian 1 week ago

        Also stress tested for 100% increase in fuel and utilities and grocers and electronics and cars and…. etc

      • J 1 week ago

        Just because the banks priced more hikes into their models doesn’t mean that they didn’t plug in other rates and saw the poopoo scenario.

        The FED just added another 75bps (2x in a row, July 27, 2022). In response, the BoC must match 75bps or even go higher to 100bps just to keep the CAD trading at 75c to the USD (Sept. 2022 meeting).

        Guess what, the US inflation is 1% higher than ours! It’s going to be bad – for every G7 nation that juiced the economy like a roided up body builder. Just like a roller coaster ride, gravity will win.

        The only good news is that there “may be” new laws and regulations to prevent such housing bubbles from ever forming again and hurting the common plebs like you and me. The rich engineered this – wake up. The class war is being fought and the very planet we live on is at stake. Housing is just a distraction.

  • dan! 1 week ago

    These calculations are correct for a 25-year amortization. For those with a 30-year amortization (like me) the trigger rate will be reached at roughly 4.1% or 4.2%. It’s stated in my mortgage agreement that the trigger interest rate on my mortgage is 4.15%.

    With another 0.5% increase I will be above the trigger point.

    I got my mortgage when the Bank of Canada rate was 0.25% and my variable rate was 1.55%. The current Bank of Canada rate is now 2.5%, if it goes to 3% my variable mortgage is at 4.3% and I’ll be above the trigger, at that point my payments won’t cover the interest.

    Just pointing out the difference between a 25-year amortization and a 30-year amortization. Not sure how many variables are 25 and how many are 30. Did National Bank do the analysis for 30-year as well? That’s the people that will be in triggered.

    • Mortgage Guy 1 week ago

      Averages don’t consider edge cases of 30-year mortgages. The share of 30-year amortizations is practically nil. You would be on the higher end of the average since they’re looking at the market.

      The spread people pay would also be different, with people who don’t negotiate and pay the posted rate reaching a trigger much faster.

    • Robert 1 week ago

      My case is exactly the same as yours. I just scheduled to double-up my payments for the next year, so I am not sure if I will get a call from the bank to increase my base monthly payment

  • Edmond 1 week ago

    Mortgage rates are falling already in BC. Fixed is down 0.5% since last month and I just got an alert from my broker about variable falling 0.2% (from 3.8 to 3.6). I think we are on the edge of the next bull market in real estate. If we get a “recession” we can expect rates down 1-2%… variable will be in th 2.0-2.3% range again in order to incentivize home sales to drive GDP and wealth effect. This is how the BofC operates

  • List of Capital 1 week ago

    Mortgage Guy you are in denial. I own 5 townhouses all with variable rates. If the rates go up just another 50bsp my payments will be adjusted accordingly. As an investor I’m operating on a break even cashflow. I can’t raise the rent more than 10% per annum but my average purchase price is 40% below last appraisal ( which is now down a lot I’m sure). I’m gonna have to sell 2 units – the buyer can raise rents required and I’ll apply my gains towards the debt on the other 3. Point being many are in the same boat. There will be a lot of investor inventory hitting the market this fall. I’ll hold onto my other 3 and ride it out. Might take 5-7 years though but rents will cover.

    • Trader Jim 1 week ago

      I think you meant to reply to someone but in any case, the real delusion is taking out a specialized product most Big Six banks don’t offer and then pretending the average person did that too.

      Almost all of the Big Six banks said on their last earnings call that variable mortgages didn’t worry them because the trigger rate had sufficient clearance to not be triggered.

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