Do you have fixed payments on a variable mortgage?  Here you will really start to feel the pain of the price hike

Do you have fixed payments on a variable mortgage? Here you will really start to feel the pain of the price hike

Those under variable rate mortgages are enjoying the fact that their monthly payments haven’t gone up, despite the higher prime rate. This is because variable rate mortgage payments are generally fixed.

But not always.

In fact, if the prime rate goes up so much that variable rate borrowers don’t even cover their interest each month, lenders usually raise their payments.

The degree of payment risk in this case depends on several factors.

How it works …

The initial rate is 3.20 per cent. If you’re in a variable mortgage (VRM) situation, it’s helpful to know how much a higher amount of principal must go before your payment is increased.

At Canada’s largest mortgage lender, Royal Bank of Canada RY-T, for example, the “approximate launch rate” would be in a range between 5.51 percent and 5.65 percent for someone in the first year of the variable, says Arjun Lombardi-Singh. , Senior Communications Director at RBC.

That assumes a $500,000 mortgage with an initial rate of minus 0.50 percent (2.70 percent) with monthly payments and a 25-year amortization. It also assumes that the base price does not fall along the way.

Using this example above, it will likely take an additional 275 basis points to raise interest rates from the Bank of Canada before we see a trigger rate above 5.51 per cent. As of Wednesday, the market was only pricing in about 225 basis points of additional price increases in the next five years. (There are 100 basis points, or basis points, in a percentage point.)

How far can variable payments go?

If stimulus rates start to appear, the jump in variable rate payments will vary for different lender and borrower.

Some lenders raise the payments by a fixed amount, or enough to ensure that your mortgage is paid off within the originally scheduled repayment period. Depending on the terms of the mortgage, this can lead to more monthly payments than the borrower expects.

At RBC, when a payment is increased at a variable rate, “the amount of the increase is the amount required to secure the payment of the accrued interest,” says Mr. Lombardi Singh. “The amount of the payment increases in increments of two dollars.”

This is a reasonable approach that minimizes repayment shock to borrowers.

advice: If you’re concerned that your lender’s starting rate might boost your payments significantly, ask them to estimate your payment change, for example, if rates would rise another three percentage points.

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Even if your payments don’t go up during your tenure, they may when you renew.

Lenders generally reset the variable rate payments upon renewal, to ensure that the amortization period is not extended.

In the case of RBC, when the mortgage is renewed, Mr. Lombardi-Singh says “the new mortgage payment will be calculated based on the originally scheduled amortization period and the customer’s rate at the time of renewal.”

So, if your first five-year term has a 25-year amortization, your payments will be determined at a 20-year amortization upon renewal. This is common in the industry. And if your payments are too high at that point, you can refinance to extend the depreciation payment and get some breathing room, assuming you have 20 percent of the equity in the home.

It is not easy to determine the activation rates because they differ for the borrower, depending on the rate and residual depreciation. Your best bet is to ask the lender or mortgage advisor for an estimate, or check the mortgage disclosure statement.

As for adjustable rate mortgages (ARMs), their payments jump every time the prime rate jumps. If prices rise as much as the bond market expects, ARM’s borrowers will eventually pay up to $90 to $100 a month, for every $100,000 borrowed, depending on their price and amortization.

This kind of payment uncertainty is exactly why more people now prefer VRMs over ARM.

Why variable penalties are cheaper

Have you ever wondered why prepayment penalties are often so much higher with fixed rate mortgages?

Standard variable fines are interest only for three months — about $800 for every $100,000 borrowed, at today’s rates.

But fixed rate mortgage penalties are usually based on a higher three-month interest rate or interest rate differential. It could go as high as $2,500 to $5,000 for every $100,000 borrowed if rates are steady to the downside – depending on the lender and interest rates at the time.

“Fixed rate mortgages are backed by investors looking for non-volatile returns,” says Andrew Gilmore, managing director at CMLS Financial. In other words, investors and banks who finance fixed-rate mortgages don’t like surprises.

When a borrower breaks their fixed-rate mortgage early, the penalties help those investors recoup the return they originally planned for, “which is why the penalty increases as new mortgage rates fall,” he said.

“On the other hand, floating rate mortgages are usually priced as the spread for a floating benchmark, the base rate for example,” he adds. This spread usually does not change significantly over the life of the mortgage.

As a result, if you break out a variable-rate mortgage early, the investor can usually reinvest close to the return that was originally planned, “because the same benchmark will be used for a new mortgage,” says Mr. Gilmore.

Furthermore, money for floating rate mortgages is often made available from internal bank sources (deposits, for example), notes Albert Colo, CEO of Marathon Mortgage Corp. “This internal cost of funds is not nearly the same as the obligation to provide a guaranteed return when securitizing and hedging a fixed rate mortgage.”

This is why the penalties for fixed rate mortgages can be significantly greater, especially when rates are lower. It is already possible that rates will fall after our central bank controls inflation. At that point, hundreds of thousands of Canadians will rush to refinance. And many will learn about sanctions the hard way.

This week’s prices

This week was a snooze of five year’s best prices, which have mostly held steady.

The value area, if you take risks, is in a constant space for one year. You can still find online mortgage brokers at a rate of 2.99 percent (eg Butler Mortgage, True North Mortgage, etc.). They and a few credit unions are pretty much the last bastion of mortgage rates below 3 percent in the country.

Lowest mortgage rates available nationally

term non-believer Provider Believer Provider
1 year fixed 3.24% group of investors 2.99% true north
2 years fixed 3.64% RBC 3.29% true north
3 years fixed 3.89% group of investors 3.69% true north
4 years fixed 3.99% Alterna Bank 3.89% true north
5 years fixed 4.04% Alterna Bank 3.89% HSBC
10 years fixed 4.64% HSBC 4.44% Nesto
Worker 2.39% HSBC 1.99% HSBC
5 years hybrid 3.24% HSBC 3.39% Scotia i Home
hello 3.05% HSBC Unavailable Unavailable

Prices as of Wednesday from providers that advertise rates online and lend to at least nine counties. Insured rates apply to those who buy with less than 20 percent down payment, or those who transfer a previously insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1 million and may include applicable lending rate premiums. For providers whose rates vary by county, their highest rate is shown.

Robert McCallister is an interest rate analyst and mortgage strategist and editor at You can follow him on Twitter at Tweet embed.

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2022-05-11 22:22:44

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