Variable Rate Mortgage Holders - It's time to be proactive

​If you currently have a variable rate mortgage with RBC, CIBC, TD, BMO, HSBC, or most credit unions, you likely have a static-payment variable rate mortgage. This means that even though Prime Rate has risen over the past few months, your payment has remained the same. Since your payment has not changed but the interest rate has, more of your payment has been going towards paying interest rather than paying down your balance. You may have already logged on to your online mortgage/banking account and noticed that your estimated remaining amortization period has been extended.
 
As Prime Rate has now risen quite a bit this year, I would recommend that you try to be proactive and take advantage of your mortgage prepayment privileges to make extra payments to your mortgage, if you are able to. 
With most variable rate mortgages, you may prepay up to 10%-15% of your original mortgage balance per year without penalty, and you may also increase your payment by 15%-100% at any time, which can help you to bring the remaining amortization back down. If you are unsure of your prepayment options, it is best to speak with your Lender or your Mortgage Broker to determine what they are. Some lenders may only allow lump sum payments to be made once per year, on your mortgage anniversary date, while some will allow you to make multiple lump sum payments at any time throughout the year. To make lump sum payments or to increase your payment, you can log on to your online banking account or call the lender directly. You may also visit any branch to make these requests.
 
A reminder that the strategy with a variable rate mortgage is a long game, meaning that even though interest rates are higher at the moment, the hope is that they will later fall during the term of your mortgage. If you have had your variable rate mortgage for some time, you have likely benefited from low interest rates for the past 2+ years. The idea is that the overall amount of interest that you pay for the entire term of your mortgage will even/average out, or put you ahead. Historically, variable rate holders have always won the rate game with this strategy.
 
Unfortunately, it appears that the Bank of Canada is doing a bit of catch-up to try to calm and reduce inflation, and most analysts are anticipating that there may be more rate increases this year. With the US Federal Reserve raising its benchmark rate by another 0.75% yesterday, many experts expect that Canada will follow suit. However, most also generally agree that this is likely going to level out within a year or two, so I am hopeful for that. As gas prices start to decrease back to "normal", staffing issues get resolved after summer to help resolve global supply chain issues, and as inflation starts to head back down, I do believe that things will start to get better. I still have faith that history tends to repeat itself and, if you look back over the last 30+ years, the rates have always come back down. 
 
In case it is helpful, here is an interesting read about Bank of Canada rate trends over the past 30 years: https://financialpost.com/investing/interest-rates-are-still-rising-but-investors-should-start-preparing-for-when-they-come-back-down?fbclid=IwAR25yXL3AdGHAUHKgYY3JrF7e_lgkQ73U_aRTO-SwInf1p5iFUfjvq0_hjo
 
Also, if you would like to hear more of my thoughts on the latest rate increase, please have a read through my latest blog post:
https://www.jenwoodley.com/blog/from-calm-seas-to-rough-waves
 
As Prime Rate rises, you may be wondering what will happen with your mortgage if you choose to maintain your original payment. Some lenders, such as the credit unions, reserve the right to adjust periodic payment amounts to account for changes in the interest rate. They may reach out to you soon to speak with you about your best options at this time. You could also choose to contact them proactively to discuss.
Other lenders may wait until you hit your "trigger rate", at which point they may require that you take action. Others may defer your interest (add it to your mortgage balance), until later.
Here is some information about how one Big Bank, TD Canada Trust, treats their Trigger Rate and Trigger Point:

What is the difference between Trigger Rate and Trigger Point?
Trigger Rate:

• As interest rates on variable products increase and the payments don't change, there will be a point where the principal and interest payments can no longer cover the interest charged on the Mortgage or Term Portion. This happens when your rate has exceeded the Trigger Rate.
• If the variable rate increases beyond the Trigger Rate, the product will have an increasing balance unless the regular payment is increased enough to cover the outstanding interest.
• At renewal, the remaining original amortization period will be used to calculate the payment amount offered.

Trigger Point:

• For insured mortgages, the Trigger Point is when the principal amount plus interest owing exceeds 105% of the original principal amount of the mortgage loan.
• For a Conventional Variable Interest Rate Mortgage (VIRM), the Trigger Point is when the principal amount plus interest owing exceeds 80% of the fair market value of the property as determined by TD.

What happens once a Customer reaches the Trigger Point? How are they notified?

• TD will notify the customer by letter and inform them of how much the principal amount exceeds the Trigger Point (the excess amount). Once notified, the customer will have 30 days to: make a lump sum payment; increase the amount of the principal and interest payment; or convert to a fixed rate term. If the customer takes no action, the customer will be contacted by TD Helps to resolve their account. If no action is taken to address the rising balance after three call attempts, the file is transferred to TD Specialized Customer Assistance for enforcement as the Mortgage is now in default.

This is just one example of how a lender may handle the changes to Prime Rate. If you are unsure of what may happen with your own mortgage, please reach out to your Lender or Mortgage Broker to inquire.

In case you would like to play around with some numbers on your own, I have an easy and free phone app that can help you estimate your payments. Here is a link to download the app: https://dlcapp.ca/app/jennifer-woodley.

If you would like to see what your payments should be at this time to maintain your original amortization schedule, please use your original mortgage balance (as stated on your original mortgage documents), your original amortization, and your lender's current Prime Rate minus your original "discount". For example, Prime Rate with most lenders is currently 4.70%, as of today, July 28th, 2022, and your discount may be "minus 0.80%". Therefore, the actual interest rate for your mortgage is now 3.90% (ie. 4.70% minus 0.80%). 
Please note that if you have a "regular" variable rate mortgage with TD (not a TD Flexline mortgage), your current Prime Rate may be 4.85%, as of today. Some time ago, TD decided to pave their own path and create their own Mortgage Prime Rate (not the same as the Prime Rate that they use for HELOCs or other products).
 
Lastly, if you are worried about rates continuing to rise and are considering locking into a fixed rate, please feel free to reach out to me to discuss this further. One thing that some variable and adjustable rate mortgage holders are doing to offset this fear is to increase payments to match what your payments would be if you were to lock in to a fixed rate at this time. You can determine this payment by using the "simple mortgage calculator" in the phone app noted above. Currently, fixed rates are sitting around 5.24% to 5.44% for 3-5 year term fixed rate mortgages with most lenders. If you increase your payment to this amount, this will help to pay down your mortgage balance without reducing your mortgage flexibility and possibly having to incur a large penalty if you need to break your mortgage in the future.
 
I hope this information has been helpful. Please do not hesitate to reach out if you have any questions or if there is anything that I can assist you with.
 
Remember that this will not last forever. I am here for you, whenever you need me!
Have a wonderful long weekend!