Interest rates may trigger bigger bills on mortgages

The Royal Bank of Canada said interest rate hikes might trigger higher monthly payments for some customers with variable-rate rather than fixed-rate mortgages. The trigger point is where borrowers’ monthly payments only cover the interest and no longer pay down any principal. 

Neil McLaughlin, Group Head, Personal and Commercial Banking, noted that there would be about 80 000 mortgages potentially affected by the impending interest rate increases; “We have gone through that analysis over the last couple of months, and we have about 80,000 mortgages that we expect with the next couple of rate hikes, we will reach that point,” 

The lender expects most borrowers to easily afford this increase, which would average about CAD $200 per month. However, most of the Royal Bank’s customers are not likely to hit those trigger rates. 

Only a small portion of the Royal Bank’s customers would require a phone call to discuss the changes, as the company Chief Risk Officer Graeme Hepworth noted that most customers would have no problem carrying the additional cost; “We can see the capacity in the vast, vast majority of that 80,000 mortgage customers, and communication will start to go out,” 

For many variable-rate mortgages in Canada, the monthly payment remains constant as interest rates rise, with the portion allocated to interest growing and the portion allocated to paying down the principal shrinking. However, periods of significant and rapid interest rate increases can potentially trigger larger monthly mortgage payments because banks are not allowed to let the portion covering the principal vanish entirely. 

Although variable rate mortgages are making up a growing portion of the Royal Bank’s new mortgages, especially over the last few years, they still account for less than 35% of the bank’s portfolio. 

Historically, about 75% of Canadian’s mortgages have been fixed-rate, with Canadians typically preferring the greater certainty of fixed-rate mortgages; however, over the last few years, this percentage is now estimated to be at about 55% - 65%, as many Canadians were lured into a variable interest rate, which was sometimes 2% lower than the fixed rate alternative. 

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