Canadians are definitely feeling the pinch of rising interest rates. In a petition on Change.org, homeowners are calling on the Bank of Canada to “change and develop strategies” regarding its overnight interest rates, saying that it should be done in a way that allows homeowners “a fighting chance” against inflation.
As of this writing, over 25,000 have signed the petition. But they may be missing the point of the central bank’s interest rate hikes. The Bank of Canada and its counterparts across the globe are raising interest rates at breakneck speeds to fight inflation, and ease prices for all consumers.
But, as interest rates continue to rise, with the BOC due for another meeting on October 26, a portion of mortgage borrowers are facing a heightened risk of trigger-rate payments this year, and for some households, this could spell devastating results.
Variable-rate mortgages are usually set up with a static monthly amount. When interest rates rise, less and less of that monthly payment goes to the principal amount. This could lead to some borrowers reaching their trigger rate or the point where the portion of the interest owed is higher than the payment itself.
But, depending on a borrower’s capacity to pay, lender-banks may be able to offer some relief.
“One thing that people sometimes get wrong about the Canadian banks is that they’re this mean oligopoly where they just come to you and kick you out of your home if you miss a mortgage payment,” Mike Rizvanovic, an analyst at Keefe Bruyette & Woods, told Yahoo Finance Canada.
“It’s not really like that. They’ll work with you and explore different avenues just to not have you forced into insolvency because it’s not really in their interest to take possession of a bunch of homes and try to sell them at potentially distressed prices,” he explained, adding that only in dire situations will the bank recommend selling the mortgage borrower’s home.
Fixed-rate mortgage borrowers renewing this year, on the other hand, are facing payments that have gone up by at least 21% based on the best rates five years ago and today.
“At a minimum, as long as the income profile is similar to what it was five years ago, the household should be able to manage the higher payment,” Ratehub.ca Co-CEO James Laird said. “It is important to note that anyone who got a mortgage five years ago would have passed the stress test rate of 4.99%, which means making the payment should still be possible, but could be painful.”
Information for this briefing was found via Yahoo Finance Canada, RateHub.ca, and the sources and companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.