Home Business Number of variable-rate mortgage holders hitting trigger rate will climb to 65 per cent next year, BOC warns

Number of variable-rate mortgage holders hitting trigger rate will climb to 65 per cent next year, BOC warns

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Houses on Sherman Block Circle in Newmarket, Ontario. March 30, 2021.Fred Lamb/Globe and Mail

Canada’s financial system should be able to weather a period of heightened stress, but many recent homebuyers could experience “painful” strain as interest rates continue to rise. bank of canadathe deputy commander said Tuesday.

In a speech in Ottawa, Senior Lieutenant Governor Carolyn Rogers said the COVID-19 pandemic had exacerbated long-standing weakness in the Canadian housing market as home prices skyrocketed and buyers became increasingly dependent. said variable rate mortgagelinked to central bank benchmark lending rates.

now degree of interest Home prices are rising, home prices are falling, and many of these homebuyers are experiencing a nasty correction, Rogers said.

The most common floating rate products have fixed monthly payments.Every time interest rates rise, borrowers Monthly payments will accrue interestHowever, when monthly payments no longer cover the principal, the borrower reaches a rate called the trigger rate, monthly payments go upIn some cases, the lender gives the borrower transfer interest to principalincrease the size of the mortgage.

A new Bank of Canada research paper released Tuesday estimates that 50% of these variable rate mortgage holders have already hit their trigger rate. That percentage will rise to 65% by the middle of next year as the central bank continues to raise interest rates to keep inflation in check.

What is the mortgage trigger rate?This calculator will help you estimate

“The bottom line is that mortgage costs have already increased for some Canadians and are likely to increase over time for others, making home ownership more expensive,” Rogers said. I was.

About 670,000 variable rate mortgages have been issued since the pandemic began, according to the Bank of Canada. Floating-rate mortgages make up about 50% of all mortgages issued since mid-2021, compared to an average of 20% in the years before the pandemic.

“It’s not a large percentage of households, but it’s larger than based on historical trends,” Rogers said.

Borrowers have been asking for floating rate products. Cheaper than a fixed rate mortgagePart of the motivation was that federal bank rules required borrowers to prove they could make monthly mortgage payments at an interest rate that was at least 2 percent higher than the actual mortgage contract. .

Homes Bellagio Crescent in Mississauga, Ontario.Fred Lamb/Globe and Mail

Problems in the mortgage market could affect the broader financial system if borrowers default on payments. Mr. Rogers said the Canadian banking system has seen potential growth since 2008 thanks to post-financial crisis reforms in 2009 that raised capital and liquidity requirements for lenders and increased stress tests on mortgage loans. He said he was well placed to deal with the shock.

Furthermore, the central bank “does not expect a severe recession with large job losses typical of past recessions,” she said.

But as interest rates continue to rise, tens of thousands of homeowners will be in trouble. The Bank of Canada is widely expected to raise interest rates again by a quarter of a percentage point or half a percentage point on December 7th. Financial markets expect the bank’s benchmark interest rate to reach 4.25% by early 2023 from his current 3.75%.

The research paper notes that over the past decade, very few borrowers have had to deal with trigger rates because interest rates have been relatively low since the global financial crisis.

“However, from March 2022 onwards, the Bank of Canada’s rapid increase in policy rates will leave variable rate mortgage borrowers very likely to hit the trigger rate, a historically significant increase in interest rates. face,” says a paper authored by Stephen. Governor’s Advisor Murchison and Economist Maria Tenenhuis.

Major lenders have downplayed trigger rates, repeatedly stating that only a small percentage of borrowers are at risk of hitting this threshold. This research paper is the first attempt by a central bank to quantify the impact of rising interest rates on variable rate mortgage holders.

Researchers estimate that these mortgages account for 13% of all outstanding mortgages. They said the estimate does not take into account borrowers’ willingness to make lump-sum payments or take other steps to avoid reaching the trigger rate.

Outstanding mortgages include fixed rate mortgages where monthly payments and interest costs remain the same for the life of the loan. It also includes variable rate mortgages with variable payments where the monthly amount changes as the central bank’s benchmark interest rate changes.

According to a Bank of Canada paper, variable-rate mortgages now account for about one-third of all outstanding mortgage debt. That’s compared to one-fifth in 2019.

Central banks are raising interest rates to contain consumer price growth. While not specifically targeting house prices, Mr. Rogers suggested banks were very happy with falling house prices. Nationwide, home prices are down about 10% from his February peak.

“We need to bring home prices down to bring the Canadian housing market back into balance and make housing more affordable for more Canadians,” Rogers said.

So far, however, higher interest rates have actually made homes less affordable, more than offsetting lower home prices. Royal Bank of Canada’s National Aggregate Affordability Index hit an all-time low in September.

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