Canadian home owners panic as mortgage trigger rate kicks in
Almost a million Canadian homeowners will see a big jump in their monthly mortgage payments as the trigger rate kicks in due to soaring interest rates.
Many borrowers who took out variable-rate mortgages during the height of the housing market frenzy in 2021 and early 2022 are now feeling the pains of higher monthly payments or addition of a lump-sum payment on their mortgages.
Canadians and immigrant entrepreneurs who have been battling with rising costs, now have one more big-ticket housing cost item to contend with.
What’s a mortgage trigger rate?
A trigger rate is the interest rate level where your mortgage lender can adjust your monthly payment amount, even though it’s normally fixed. The trigger rate applies to variable-rate mortgage holders that are on a pre-set payment schedule.
That’s the point where borrowers’ monthly payments are only covering the interest and are no longer paying down any principal.
This means borrowers will be contacted by their lender and, typically, given the option to either increase their monthly payment, or make a lump sum payment against their mortgage to lower the amount owing.
The vast majority of variable-rate mortgages have fixed monthly payments, but soaring interest rates mean many of them have already hit their “trigger rates,”
Around 15% of the mortgages in Canada are in this group, according to an estimate from Ben Rabidoux, a prominent housing market analyst. That amounts to around 750,000 mortgages.
According to Neil McLaughlin, RBC’s Group Head, Personal and Commercial Banking, over 80,000 borrowers at RBC alone would be affected by this trigger rate due to the rising interest rate.
Effects of rising interest rates on home owners and immigrants
Canadians took out $260B-worth of variable-rate mortgages between March 2021 and February 2022, at a rock-bottom average interest rate of 1.58%. With mortgage rates now standing at around 5.5%-6.5%, it is big pressure time.
What are the other effects for home owners and immigrant investors, and what else can they do?
Some borrowers may “panic” and switch to a fixed-rate mortgage out of fear rates will rise further.
The danger here is that there’s a chance borrowers could end up locking themselves in at unnecessarily high rates. It could be described as “a self-induced payment shock to avoid a potential future payment shock.”
Shahab Shahisavandi, a Mortgage Broker at Dominion Lending Centre counseled that when it comes to real estate investment and mortgage choice, one should “think holistically and long-term.”
Softer housing market and panic sales
Higher monthly payments could push some owners, especially investor-owners, to put their properties on the market, adding to an already growing supply of homes.
Buying opportunity for real estate investors?
One person’s pain might be another person’s gain. The higher interest rate has driven many buyers out of the market.
House prices have dropped by as much as 30% in some areas. This could therefore be a buying opportunity for cash-rich investors.
Rents and mortgage rates often go in the same directions. With the record high interest rates, many prospective home buyers have been forced to rent instead of buy.
Demand and prices for rental properties have soared accordingly.
Private lenders’ big squeeze and forced sale
The greatest pressure could also be coming from the private lender segment of the mortgage market. Private lenders offer less creditworthy borrowers mortgages at much higher rates,
Some mortgages will be “called” as rates rise even further, meaning that borrowers will be asked to pay off the balance immediately.
That could lead to forced sales in the housing market, and further downward pressure on prices. But the impact should be fairly limited, as private lenders amount to a very small share of Canada’s mortgages, around 1% as of 2019.
Ontario and British Columbia, account for almost 85% of total private loans
There’s no quick fix. Rock bottom interest rates are not coming back anytime soon.
The need for prudence, discipline and aggressive budgeting has never been greater for home owners and immigrant investors.
For long-term investment, demand and supply always have to balance, and the housing market will eventuality bounce back. Panic is certainly not the solution.