Variable rate mortgage holders

October 11, 2022

To all federally regulated financial institutions

Subject: Variable rate mortgage holders

Variable rate mortgages constitute a sizable portion of mortgages held by Canada’s federally regulated financial institutions (FRFIs).

Given the current interest rate environment, FCAC is concerned about the impact of recent interest rate increases on consumers who hold variable rate mortgages.

More specifically, FCAC expects financial institutions to pay particular attention to consumers who find themselves in the following circumstances.

1. Consumers whose payments on their variable rate mortgages fluctuate with interest rates (variable payments) and who have therefore had their payments rise.
2. Consumers whose payments on their variable rate mortgages are fixed and have therefore had less of their payment paying down the principal and more of their payment covering the increasing interest.

Consumers whose payments on their variable rate mortgages fluctuate with interest rates (variable payments)

Consumers making variable payments may be facing challenges in making increased payments and may also be concerned about the possibility of future interest rate increases. In such circumstances, these consumers would benefit from advice, from their financial institution, or other reputable source, on their options and how to effectively manage the financial hardships caused by payment increases.

Consumers whose payments on their variable rate mortgages are fixed and have therefore had less of their payments paying down the principal.

Consumers making fixed payments may not realize that, as a result of rising interest rates, their payments are not keeping pace with their mortgage amortization schedule. Unlike those with variable payments, these consumers do not see the ‘flag’ of an increased payment affecting their bank balance.

Furthermore, such mortgages may be reaching their ‘trigger point’.  While the trigger rate must be disclosed within variable rate mortgage agreements, consumers may not be tracking it in relation to recent interest rate increases.

If not addressed early, these consumers may face financial hardships when confronted with making a large lump-sum payment before or at mortgage renewal to maintain the amortization schedule, incurring a significant increase in mortgage payments to maintain the amortization schedule, or re-mortgaging to establish a new amortization schedule resulting in significantly higher total interest costs.

Role of financial institutions

Considering the current interest rate environment, financial institutions have a role to play in minimizing the potential negative impacts on consumers with variable rate mortgages.

FCAC expects financial institutions to:

• proactively contact their consumers whose trigger rate (or trigger point) is reached or will soon be reached;
• consider providing their consumers with accommodations including reducing or waiving fees and charges;
• ensure their consumers are being offered and sold appropriate financial products and services;
• ensure front-line staff are equipped and trained to provide appropriate advice and assistance to their consumers; and,
• direct their consumers to trustworthy sources of information to help them make informed mortgage decisions (e.g. FCACs’ mortgage information and tools: information on mortgages).

FCAC will continue to monitor the impact of rising interest rates on consumers.