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Half of variable-rate fixed-payment mortgages have hit trigger rate: Bank of Canada

Elevated view of houses in Mississauga, Ontario, Canada. (Photo by Creative Touch Imaging Ltd./NurPhoto via Getty Images)
The Bank of Canada said half of all homeowners with a variable rate, fixed payment mortgage had reached their trigger rate by Oct. 2022. (Photo by Creative Touch Imaging Ltd./NurPhoto via Getty Images) (NurPhoto via Getty Images)

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

The note also warned that number could rise to 65 per cent of homeowners if the central bank hikes its key lending rate by half a percentage point at its upcoming December meeting, as many Bay Street economists expect.

Most variable-rate mortgages in Canada have static monthly payments, meaning the payment will remain the same even as interest rates change. Trigger rates are activated when the interest portion exceeds the payment itself, and it's a trend that has become more widespread amid the sharp jump in interest rates this year.

Once a homeowner hits their trigger rate, they're typically given several options by the lender, including paying a lump sum towards the loan to bring the principal down, increasing their monthly payment to cover the entire interest portion, or extending the amortization period.

A small number of lenders will also allow a negative amortization to occur, where the mortgage loan grows month to month.

The Bank of Canada said half of all homeowners with a variable rate, fixed payment mortgage had reached their trigger rate by Oct. 2022.
Bank of Canada, Staff Analytical Note 2022-19

The Bank noted its calculations did not take into account homeowners who have already taken actions to reduce their mortgage loan and bring their amortizations back in line.

Separately on Tuesday, Bank of Canada senior deputy governor Carolyn Rogers said in a speech that the central bank was monitoring how higher borrowing costs were impacting homeowners.

"One group of Canadians who will be finding this adjustment painful are those who recently purchased a home, potentially stretching their budget to do so, and who chose a variable-rate mortgage," Rogers said.

"This is not a large share of households, but it is larger than it would have been based on historical trends."

Variable mortgage rates had become widely 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 per cent at the end of 2019.

The Bank reported that the median payment increase for mortgages that had reached their trigger rate was likely around five per cent.

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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