Updated: Nov 16
How does this impact your Variable Interest Rate Mortgage (VRM) monthly payments?
I get this question lot of time for variable interest rate holders.
Will our monthly payment of the mortgage go up?
Yesterday, The Bank of Canada increased its target for the overnight rate to .50%, with the Bank Rate at .75 %.
All chartered banks, monoline lenders, other financial institutes and credit unions Prime Rate has also gone up from 2.45% to 2.70%. An increase of .25%
Every time you make a monthly mortgage payment, a portion of the money goes towards paying down the principal and a portion is of interest.
With a closed variable rate mortgage, which is based on bank prime rate and the discount, your regular payment REMAINS THE SAME regardless of whether or not interest rates change.
If interest rates go up, the portion of your payment that goes towards interest, however, will increase, meaning it will take longer to pay down the principal. On the other hand, if rates go down, you’ll be paying more principal and less interest with every payment.
The one exception is in the case that interest rates rise to the point that your payment doesn’t cover the interest portion of the payment (known as the “trigger rate”). In this situation, your lender will either increase your payment amount or require you to make supplementary payments to cover the difference.
With an open variable rate mortgage, your mortgage payment will increase or decrease as rates change so that the interest–principle ratio remains the same. The downside here is that if interest rates climb sharply, homeowners may have difficulty covering higher mortgage payments.