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

The Bank of Canada said half of all homeowners with an adjustable-rate, fixed-payment mortgage would have met their trigger rate by October 2022. (Photo by Creative Touch Imaging Ltd./NurPhoto via Getty Images)

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

The release also warned that homeownership could jump to 65 percent if the central bank hikes interest rates by half a percentage point at its upcoming December meeting, as many Bay Street economists expect.

Most adjustable rate mortgages in Canada have static monthly payments, meaning the payment stays the same even as interest rates change. Trigger rates are activated when the interest portion exceeds the payment itself, and this trend has become more widespread given the sharp rise in interest rates this year.

Once a homeowner reaches their trigger rate, the lender typically gives them several options, including paying a lump sum on the loan to reduce the principal amount, increasing their monthly payment to cover the entire interest portion, or extending the payback period.

A small number of lenders also allow for negative amortization, where the mortgage loan grows month by month.

The Bank of Canada said half of all homeowners with an adjustable rate and fixed payment mortgage would have met their trigger rate by October 2022.

Bank of Canada, Staff Analytical Note 2022-19

The bank noted that its calculations did not take into account homeowners who have already taken steps to reduce their mortgage loan and bring their amortization back into line.

Separately, Bank of Canada Deputy Governor Carolyn Rogers said in a speech on Tuesday that the central bank is monitoring them how higher borrowing costs affected homeowners.

“One group of Canadians who will find this adjustment painful are those who recently bought a home, may have stretched their budget, and have opted for an adjustable rate mortgage,” Rogers said.

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

Variable rate mortgages have been prevalent 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 percent at the end of 2019.

The bank reported that the average payment increase for mortgages that have reached their trigger rate is probably about 5 percent.

Michelle Zadikian is Senior Reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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