Half of variable mortgage holders with fixed payments have hit trigger rate: BoC

The Bank of Canada is estimating that nearly two-thirds of variable-rate mortgage holders on fixed payments will hit their trigger rate by mid-2023.

The Bank of Canada estimates half of Canadian homeowners who took out a variable-rate mortgage with fixed payments have already hit their trigger rate.

Hitting a trigger rate means a mortgage holder is no longer paying down any principal on their loan and is only covering interest — a key point that can prompt the lender to force a homeowner to make additional payments.

Some 50 per cent of variable-rate mortgage holders with fixed payments had hit their trigger rate, as specified in their mortgage contract, by the end of October, the central bank estimates, representing some 13 per cent of all mortgage holders in Canada.

With market rates for variable mortgages expected to continue to rise, the Bank of Canada expects 65 per cent of these mortgages will hit trigger rates by mid-2023.

The findings come as part of an analysis from the central bank tracking the impact on variable mortgage holders amid its campaign to hike interest rates and raise the cost of borrowing in hopes of slowing the economy and taking the steam out of inflation.

Variable-rate mortgage holders were especially popular for most of 2021 and early 2022, the central bank noted in the report, as low interest rates made these products especially affordable for those looking to renew or jump into the housing market.

But with interest rates much higher today than when the loans were initiated, these households are facing steeper mortgage rates. The bank’s policy rate has risen 3.5 percentage points so far this year in one of the most aggressive tightening campaigns in its history.

The Bank of Canada notes that three quarters of variable-rate mortgages are on fixed payments, meaning these households typically pay the same amount on their mortgage monthly when rates change. What is different as rates rise then, is that more of the payment covers interest rather than the principal loan amount.