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 the 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,” King warns

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.

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