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Bank of Canada rate hike will impact many borrows trigger rate

Tomorrow, Wednesday, September 7. The bank of Canada is meeting again to talk about increasing their overnight lending rate and it is widely predicted that it's going to go up anywhere between a 0.50% to 0.75%, or maybe we'll see a super sized rate hike like we did last time of a full 1%. Regardless of what the bank of Canada does tomorrow, many borrowers, especially those that got a mortgage in 2020 or later and decided to take a fixed payment variable rate mortgage and if you don't know you need to look, are likely going to hit something called their trigger rate. Today's post is all about hitting this trigger rate and what the impact of hitting that trigger rate might mean for your mortgage. If you are someone that bought a home in the last two years or someone looking to buy a home, this post is definitely for you.

What's good everybody? It's Darin Germyn from the Germyn Group, where we know you've only got one chance at either buying or selling your next home. So we're here to help you get it right.

Okay, so we're talking about fixed payment variable rate mortgages. So what exactly are they?

Well, let me caveat that a little bit first by letting you know what banks offer them. You've got most of the big five banks like CIBC, TD, you've got BMO and you've got CIBC. But you've also got some other lenders that offer them as well. Places like Coast Capital Savings, HSBC, BlueShore Financial, EnVision Financial and Vancity all offer these fixed payment variable rate fixed mortgages.

If you've got a loan with any of these providers, this might apply to you. So continue to read. So a fixed payment variable rate mortgage is a mortgage rate that kind of floats. It's a mortgage with a floating rate that is linked to prime, which means the interest rate may change as per the decisions by the bank of Canada. Specifically, a fixed payment variable rate mortgage will not have the rate change, but the life of the loan or the amortization will change.

This means as an example, if the fixed rate drops, then the amortization or the life of the loan will drop. But if it goes up, the amortization can also go up. So you've reached a trigger rate when 100% of the money that you are paying only goes towards servicing the interest of your mortgage. This means that every dollar goes to 100% of the bank. No money is going into the BankvAccount of Equity building your equity in your own Home.

You can find out if you have one of these by looking in the documentation that you would have signed with your lawyer or your notary when you took your mortgage. But when someone has entered into this type of loan. Very similar to a home equity line of credit. Because you're not paying anything into your principal or into your equity for your property. You essentially have an amortization of FOREVER this means with no changes to what you're doing.

You could effectively have your mortgage for forever. And of course the reason for this is because no principal is being paid down whatsoever. Most likely for anybody that has hit their trigger rate or will hit their trigger rate subsequently, from today on, there's a few things that are going to happen and your bank likely is going to reach out to you and offer you a few solutions. The number one solution they're going to offer is to increase your payments. So you are putting more money down towards your mortgage, meaning you're paying some money into your equity, you're not just paying interest.

They also might suggest that you do a lump sum payment for your mortgage. So you're kind of putting some money into that equity pile and that's a great option for those of you that have extra money laying around. But that's not the reality for many of us. And of course the last thing that they might suggest is that you lock into your mortgage taking one of their fixed rate products, which if you're going to do that, you definitely want to reach out to your mortgage professional or even to us and let us know before you decide to do something like that. Now, this is very important if you choose to do nothing, which some of you might do, you might do absolutely nothing with this for the amount that you owe to the bank.

If you're not actually paying that, what it could do is get added on to your mortgage, meaning your mortgage is actually getting higher. Think of this somewhat is like a reverse mortgage where every time you pay your mortgage, you think you're paying your mortgage, but your mortgage amount is actually increasing with each payment because you're not paying the full amount. So here's some quick facts for everybody that's reading, just so we all have a very clear understanding of what this is. Again, your specific trigger rate is in the lender's disclosure documents that you would have signed with your lawyer or your notary when you took your mortgage. So that's the first spot to go look to see if you have this type of mortgage.

Also mentioned already, this trigger rate is very important to anybody that got a mortgage, basically since the rates completely plummeted at the start of COVID. So if you got your mortgage in around March of 2020, you definitely want to pay attention to this. If you've been using the strategy of increasing the payments you make to the bank every time the bank of Canada has raised their rates over the last few months, then this likely doesn't apply to you and you're likely doing okay, but it doesn't hurt to check with your lender. And the last thing I'll add is, in the last 25+ years, we have never hit a trigger rate like this because of the bank of Canada increases like we will en masse. This hasn't happened to this many people at the same time, just because of how many people started buying homes in early 2020 and throughout the Pandemic.

So there is no doubt there is going to be an influx of really detrimental headlines coming out tomorrow. As soon as the bank of Canada makes their announcement, there's going to be economists everywhere saying things. You're going to read all about this and it's going to be the number one thing on the news, no doubt. The fact remains that the people in this fixed rate, variable rate mortgage are going to actually see very little change in their payments. That's important to remember.

What is true, though, is those that are in that type of lending scenario are going to see a lot less of their money going towards the principal to pay down their mortgage and own their house. More of that money is going to be going to the bank and the bank's pockets. Your choice, of course, is to pay the maximum amount of interest or to really increase your payments. So you're putting more towards your equity as you continue to pay your mortgage off. That's really it.

So I've left the link below where you can contact me whether you're buying or selling your home, or if you have questions about this particular topic, you can schedule a time to speak directly with me and we'll help you with whatever your real estate needs are. Again. Guys, I'm Darin Germyn from the Germyn group. I hope you found this post useful today because I thought it was very interesting as well. You've only got one chance to buy or sell your next home.

We're here to help you get it right. We look forward to seeing the next post. Cheers.

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Darin Germyn PREC* & Adam Howsam
Macdonald Realty LTD
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