The Bank of Canada hikes rates…again.
On September 7, the Bank of Canada again raised its benchmark interest rate by 0.75%, hiking the cost of borrowing for Canadians, especially home and property owners. This marks the fifth rate hike by the Bank of Canada in 2022.
Those borrowers with variable-rate mortgages, with fixed or static payments, need to pay attention. Each time the rate goes up, as they’ve done five times so far this year, Canadians with variable rate mortgages do not typically see their monthly payments change. Rather, rising rates see them pay down more of the interest and less of the principal on their mortgage, which ends up extending the amortization or overall length of their loan.
A “trigger point” occurs when you are no longer paying down any of the principal on your mortgage and are only paying interest, meaning that, in effect, your mortgage is growing instead of shrinking because your monthly payments aren’t covering all the interest accumulating on your mortgage loan. When you’ve surpassed the trigger rate and your outstanding balance on the loan exceeds the principal — the original amount of your mortgage when you purchased your home — that’s the trigger point, which will result in needing to increase your monthly payments so that you’re paying down more than just the interest each month.
We encourage all home and property owners with mortgages (especially those of you with variable rate mortgages, or fixed rate mortgages that are coming up for renewal in the near future), to review your current situation in this rising rate, rising inflation environment that Canadians are living though to ensure that you are aware of your circumstances and options regarding your personal finances. As always, WealthONE is here to provide support to all our customers.