Trigger Mania
During a time of fluctuating interest rates and various economical concerns, brokers at GLM Mortgage Group want to educate and support clients in understanding what may happen with rates over the coming months, and outline any cause for concern, if any. It’s important to remember that the media sometimes relays fear-based messages that can be explained by speaking with a mortgage professional.
There are many moments of paranoia when it comes to rate increases. Most customers will see an increase in their monthly payments. The increase will vary pending on the mortgage amount; an A lender expects most borrowers can afford, and most variable-rate mortgage customers won’t hit those trigger rates.
Variable-rate mortgages have always been less popular than fixed-rate ones in Canada, typically accounting for less than a quarter of all mortgages. During the pandemic, the rates on variable mortgages dropped far below those on fixed mortgages, and by the start of this year, a third of all mortgages issued were variable.
A higher-than-normal share of mortgage borrowers are exposed to fluctuating interest payments from month to month — at a time when rates are rising quickly. Some of these borrowers may “panic” and switch to a fixed-rate mortgage out of fear rates will rise further — This can be described as “a self-induced payment shock to avoid a potential future payment shock.”
Locking in a fixed rate is a gamble at today’s interest rates, and we do not recommend doing this. Bond markets are still higher than a few more rate hikes from the Bank of Canada, and interest rates are expected to fall from those levels in the long term. All the same, mortgage rates probably aren’t going back down any time soon.
Besides the hit to homeowners with the increase of rates, the question on the minds of many real estate observers, is how much of an impact these “triggered” mortgages will have on the housing market. Higher monthly payments could push some owners, especially investor-owners, to put their properties on the market, adding to an already growing supply of homes.
Despite the rapid increases in global house price, at least one top economist says that isn’t cause for automatic alarm about another global financial crisis. Many have stated that this isn’t a time for panic, but a time for vigilance. The dynamics are different from the housing boom of the 2000s for two reasons:
- The current rise in house prices is not synchronized across countries. “And within countries, the boom is often restricted to one or a few cities. In many cases, the booms are not being driven by strong credit growth: some house price increases, particularly at the city level, are due to supply constraints.”
- In its own report on the Canadian housing market, Fitch Ratings, while acknowledging the increasing vulnerability to a steep price correction, said there are key “structural features” that would safeguard a housing crisis like that seen in the U.S.
It is no secret that interest rates are continuing to rise. The Bank of Canada has done a super-sized rate increase the past few times with interest rates increasing by half a point or more. Many people who are in a variable-rate mortgage ask what a trigger rate is and how it could affect them. There are two types of variable-rate mortgages. The first is ARM and the second is VRM.
The affect that trigger rates are having on the market, is one of the reasons many people are panicking. Many think this increase will have a huge impact on the future, and that the outcome can be crucial.
It is PARTICULARLY important to have a clear understanding of the implications when it comes to trigger mania within the market. It makes a significant difference in future planning and can impact you in incredibly substantial ways.
At GLM Mortgage Group, we know what questions to ask. We have relationships with the lenders that you know about and the lenders you don’t. We would be pleased to educate you on the financial options available to you. We want you to make the best decision possible on the mortgage that you are committing to. Call us anytime for a FREE consultation on the mortgage products available to you.
