As interest rates climb, you may be wondering whether the payment on your variable rate mortgage will increase. The answer to this question is — it depends.
If you are one of the 25% of Canadian mortgage holders that has a variable mortgage with a fixed payment option, then your payments will not increase unless you hit the “trigger rate”.
Variable rates are benchmarked against the major banks’ prime rates. These prime rates are in turn pegged to the Bank of Canada rate. With the Bank of Canada having recently raised its rate to 2.5%, the banks’ prime rates are now hovering at 4.7%. As a result, the rate that you pay on your variable rate mortgage may or may not go up.
You may have a variable-rate mortgage that holds payments constant even in rising rate environments. If you have this type of mortgage, rather than increasing the mortgage payment when rates rise, your lender will apply a greater portion toward the interest rather than the principal. Thus, you will see your amortization period extended, which means that it will take you longer to pay off your mortgage balance. Accordingly, you may want to review and adjust your longer-term financial plan to account for the fact that it may now take you 20 years instead of 15 years to pay of your mortgage, for example.
As the lender cannot extend the amortization beyond a certain period mandated by the government, the interest rate may reach a point at which they will be forced to raise your payment. This is known as the “trigger-rate”. Your mortgage contract will contain your particular “trigger rate”.
Once you hit your “trigger rate” your payments will increase even if you hold a mortgage with a fixed payment option. Of course, if you are one of the approximately 5% of Canadian mortgage holders that own a completely variable mortgage you will certainly see your payments increase.
In these uncertain times it is increasingly important to take stock of your financial circumstances. Speak to your Foster & Associates financial advisor today on how changes in your mortgage payment or amortization schedule may impact your long-term financial goals. We’re here for you.
Disclaimer: This article is for general information purposes only, and is not legal, financial, or tax planning advice. Everyone’s situation is unique, and this article cannot apply to every person. The reader should not take any action, or refrain from taking any action, as a result of this article without first obtaining legal or professional advice.
