Over time, some questions become classic. Thigh or chest? Porthole or corridor? Matte or shiny? These days, the eternal dilemma “fixed or variable rate?” is particularly popular. Because the answer can have distressing consequences such as having to continue paying for the house after turning one hundred years.
Annik Arvisais was shocked when she opened the CIBC envelope. The Bank told him that his mortgage would be paid in full in 62 years and 4 months. “I haven’t slept all night! He went from 23 to 42 and 62 in a very short time. The house was purchased in 2016.
You will have understood that she took out a variable rate loan, but that her payments are fixed. Each interest rate increase delays, therefore, the day when she will be released from her mortgage burden, because she pays less and less of the principal.
Last July, when signing his contract with CIBC, he opted for the variable rate at 3.75%. Now it stands at 5.35%.
If this rate were frozen forever, Annik would make her last payment at 103, she tells me with a laugh, which is very funny, even if she doesn’t find it funny. This scenario is not going to happen, but the owner of a family childcare service regrets having opted for the variable rate, which she had been advised to do. “The fixed rate was a bit more expensive. But it’s less scary. I need routine. »
Of course, it is impossible to change the past. But it is imperative to move forward, believe two experts from mortgage brokerage firm nesto. Because Annik is currently paying just $52.19 per month in principal and the Bank of Canada is expected to raise its key rate again on December 7th.
Therefore, there is a real risk for the mother and businesswoman of reaching the “trigger rate” or “activation rate” (shot rate, in English). Which is far from nice.
This moment occurs on the day the monthly payment is no longer enough to pay the interest.
The phenomenon is unknown and poorly documented, because for 30 years in Canada, the rates have followed a downward trend. But we’re not done hearing about it. In August, the Royal Bank said that 80,000 of its customers were close to the trigger rate.
When hit, the lender forces his client to increase his monthly payment. “We repay the loan balance over 25 years, but exceptionally, it can go as long as 40 years,” says Damien Charbonneau, co-founder and COO of nesto. The customer has no choice but to accept. The increase can be difficult to collect, especially in the midst of an inflationary period.
If you have an adjustable rate mortgage, the “trigger rate” is specified in your contract.
“My best advice to Annik is to increase her monthly payments,” says Chase Belair, co-founder and lead broker at nesto. This strategy will save you time. You could also make early repayments to reduce the principal borrowed.
Another possibility is to convert the mortgage to get a fixed rate. But many experts, including those at Nesto, believe that most rate hikes are behind us, so now may not be the best time to exercise this option.
If you are close to the trigger rate, your lender should “proactively” contact you. At least, that’s the expectation expressed by the Financial Consumer Agency of Canada (FCAC) on its website. It will be interesting to see how the banks will react, and whether this will worsen the slackness in the Canadian housing market to the point of weakening the country’s economy, as Manulife recently suggested.
One of the catastrophic scenarios for banks is to reach breaking point and force everyone to higher payments. There would definitely be defaults.
Damien Charbonneau, co-founder and COO of nesto
Precisely to avoid unpleasant surprises of this type, nesto recommends variable payments that fluctuate like rates. This option discourages homeowners who want the lowest possible monthly payments. But you have to be aware of the risks inherent in this choice.
The good news for Annik is that she has the financial freedom to increase her mortgage payments by a few hundred dollars a month. After your “fixed or variable rate” dilemma last summer, it’s time to make decisions again.