Variable-rate mortgage holders should know the drill by now.
Prime rate is rising another 50 basis points on Thursday, increasing borrowing costs once again for those with a variable-rate mortgage or home equity line of credit (HELOC).
RBC, BMO and TD Bank kicked off the prime rate increases on Wednesday, followed by the remaining Big 6 banks and other financial institutions across the country. In the case of TD, its mortgage prime rate has risen to 6.10%, the result of an additional 15-bps hike the bank made in 2016 independent of a Bank of Canada rate move.
The announcements followed the Bank of Canada’s 50-bps rate hike earlier in the day.
More borrowers to reach their trigger rate
For those with an adjustable-rate mortgage, this latest increase will translate into roughly $30 more in monthly interest cost per $100,000 of mortgage.
The majority of variable-rate mortgage holders, however, have fixed monthly payments. While their monthly payment won’t change, a larger percentage of that payment will now go towards the interest portion, while a smaller percentage will go towards paying down the principal balance.
For some, it could mean they are no longer paying down their balance at all, with 100% of their monthly payment going towards interest cost. For those borrowers, they have hit their trigger rate.
In its third-quarter earnings call, RBC alone said it expected 80,000 of its variable-rate mortgage clients to reach their trigger point by year-end.
“Borrowers with an adjustable/variable rate mortgage are dealing with a huge increase in payments in nine short months,” said Ross Taylor, a mortgage agent with Concierge Mortgage Group.
A borrower with a $585,000 adjustable-rate mortgage, 30-year amortization, and starting with a 1.45% mortgage rate will have seen their monthly payments increase by about $1,120 per month since February, or more than 55%.
If they have a static payment, their $2,005 monthly payment is now no longer paying down the mortgage balance.
“They are now in a state of negative amortization,” Taylor told CMT. “Your $2,005 payment is all going towards interest. In fact, the monthly interest is now $2,413. This means that your mortgage balance is increasing by $408 next month!”
So, what can mortgage borrowers who are on a “collision course” with their trigger rate do?
“Increase your monthly payment immediately, whether the bank has asked you to or not; it’s just a matter of time before they do,” Taylor explains. “You will find that increasing your payment is likely far easier on your cash flow than converting to a fixed-rate alternative.”
What about fixed rates?
As for fixed mortgage rates, they’ve been marching higher, following the lead of bond yields. That was, until today.
Bond markets had priced in a larger 75-bps rate hike today, so the Bank of Canada’s unexpected 50bps hike caused bond yields to plunge more than 20 bps.
In a Tweet, mortgage expert Ron Butler of Butler Mortgage said the fall in yields could result in a small decline in fixed rates of 10-15 bps.
According to data from Rob McLister, editor of MortgageLogic.news, the average nationally available, deep-discount uninsured 5-year fixed rate is now 5.65%, up from 5.57% a week ago.