The Bank of Canada is rapidly raising interest rates in an effort to reduce inflation, cool the demand for goods and services and in turn, make everyday life more affordable for Canadians. For homeowners with a variable rate mortgage, we understand there may be uncertainty about the impact rising rates will have on your mortgage and finances.
This page will help you to understand the effect of rising interest rates on your mortgage and the options available to you as an RBC client.
RBC Variable Rate Mortgages
If you hold an RBC Variable Rate Mortgage, part of your regular mortgage payment is applied to your mortgage principal and the other part is applied to accrued interest on the principal.
What happens when rates change:
- When rates increase, your scheduled payment does not increase – rather, more of your payment is allocated to the accrued interest, and less to the principal.
- When rates decrease, more of your payment is allocated towards paying down the principal of your mortgage.
- When less of your payment is applied to your principal, your amortization1 will increase, which means it will take longer to pay off your mortgage.
- When it’s time to renew your mortgage, your amortization schedule will be brought back to its original timeline. In the case where a rising prime rate has resulted in less of your payment being applied to your principal balance, your mortgage payment will likely increase at the time of renewal, possibly by a large amount.
Your Options as a Variable Rate Mortgage Holder
Increase your mortgage principal payment
By increasing your mortgage principal payment, you can reduce the amortization. There are three ways to increase your payment:
- Increase your scheduled payment by 10%2.
- Make Double-Up mortgage payments3.
- Prepay 10% of your original principal mortgage amount each year4.
You can proceed with any of these options within RBC Online Banking by navigating to the bottom of your mortgage details page.
Switch to a fixed rate mortgage
You can switch from a variable rate mortgage to a fixed rate mortgage equal to or greater than your remaining term at any time at current fixed rates5.
This option may appeal to homeowners who feel more comfortable with a fixed rate that is locked in, protecting against any future rate changes within your term and keeping your amortization timeline on track.
To learn more about this option, book an appointment online or call us.
Other Things to Consider
Triggering Interest Rate
In some cases, an increase in the RBC Prime Rate6 may result in a Triggering Interest Rate. This is when your regular payment is no longer enough to cover the interest portion on your mortgage. If this event occurs, your mortgage payment will automatically increase to cover the accrued interest. Affected clients will automatically receive a Payment Change Notice advising of the increase.