Half of variable-rate mortgages with fixed payments have reached trigger rate: BoC report

Homeowners are now grappling with a concept that was seldom discussed prior to July 2022

The November staff article from Bank of Canada shows that 13 per cent of all mortgages in Canada have reached their trigger rate | Photo: Peter Dazeley/The Image Bank/Getty Images

Half of variable-rate mortgages with fixed payments – about 13 per cent of all mortgages in the country – reached their trigger point in October 2022, according to an article from Bank of Canada staff.

The trigger rate is the interest rate at which the mortgage holder is not paying down any principal, as the total mortgage payment is only covering interest. If interest rates go beyond the trigger rate, then the amount paid towards interest will be more than the amount dedicated to the mortgage. This could mean that mortgage holders may need to increase their payments in order to cover the additional interest, according to the article. 

Prior to the one per cent rate hike in July 2022, variable-rate mortgages were the most desirable options for homeowners, said Eitan Pinksy, owner of Pinksy Mortgages.

“When they got the mortgage, it made sense to go with a variable because in the last 35 years, every year, it made sense to go with a variable over a fixed, except for in the past year and a half,” said Pinksy.

Variable-rate mortgages now account for roughly one-third of total outstanding mortgage debt; this is up from about 20 per cent at the end of 2019, the Bank of Canada said.

For some banks, the topic can be confusing and difficult to explain to homeowners, Pinksy said. 

“A lot of banks don't know how to communicate this with their clients, and the reason why is this has never happened before. We've never been at a point where rates have gone up by three times,” he said. 

The Bank of Canada said rates have remained low since the global financial crisis, “so few borrowers over the past decade have experienced a situation where the trigger rate has been reached. 

“But with the rapid increases in the policy interest rate by the Bank of Canada since March 2022, variable-rate mortgage borrowers have faced historically large interest rate increases that make reaching their trigger rate a significant possibility,” the Bank said. 

Before July 2022, the words “trigger rate” and “trigger point” were not part of everyday language, said Pinksy. But now, they are top of mind for anyone who works in the mortgage industry. 

Daniel Vyner, principal broker at DV Capital, said that trigger points and trigger rates are weighing on his clients. 

“We're receiving an increase in calls from homeowners. Some are gravely concerned and they never expected rates to raise this high. They have expressed that they are ‘financially tapped out.’ They've been taken aback or caught off guard by the trigger letters or notices that they've received and some are voicing that they feel that there's no other option than to list and sell their property,” he said. 

The shock of these letters is a product of the low interest rate environment seen prior to July 2022. Before then, it was just a foreign word, he said. 

“Now that we're in a rapidly rising rate environment, all of a sudden homeowners are getting these phone calls, they're getting these letters mailed to their front door, and they're saying 'Hold on a second, what is the trigger rate?',” he said. 

“There's a really big increase in articles about it. Whereas you didn't really see anything about that for the last five years or so, maybe even longer.”