Monthly payments on variable-rate mortgages could increase as borrowers near their ‘trigger rate’

An obscure feature of variable-rate mortgages may push up the monthly payments for an increasing number of borrowers as the Bank of Canada aggressively hikes interest rates.

It’s called the “trigger rate” – the interest rate level that, when surpassed, causes a mortgage holder’s monthly payments to change. The trigger rate has been largely ignored for decades, because the last time Canadians had to deal with fast-rising rates was the late 1970s.

But that is changing. The central bank’s benchmark interest rate is already 125-basis-points higher than in early March. And the rate is expected to march higher until inflation slows.

That means borrowers with a variable rate mortgage whose payment is the same every month pay more interest and less principal with every rate hike. Until the Bank of Canada started raising the benchmark interest rate in March, most of those borrowers saw the same proportion of every monthly payment go toward their principal.

Now that interest rates are rising, these borrowers are moving closer to their trigger rate – a level at which their regular monthly payments will not be enough to cover the interest for the period.

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