When the Bank of Canada increases its policy interest rate, lenders commonly raise their prime rates. Since variable-rate mortgages are generally linked to prime, your mortgage interest rate will usually rise as well.
However, your mortgage payment doesn't necessarily increase immediately. It depends on the type of variable-rate mortgage you have.
There are two common structures.
Option 1: Variable Rate With Adjustable Payments
With an adjustable-payment variable mortgage, your payment generally changes when your interest rate changes.
If rates increase, your payment will usually rise to reflect the higher interest cost. If rates decrease, your payment may fall.
The advantage is that your payment adjusts as rates change, helping keep your mortgage repayment on track under the terms of your agreement.
The challenge is that you need enough room in your budget to manage higher payments.
Option 2: Variable Rate With Fixed Payments
With a fixed-payment variable mortgage, your scheduled payment may initially stay the same even when your interest rate rises.
But that doesn't mean the increase has no impact.
When rates rise, more of your payment goes toward interest and less goes toward paying down your principal. Your mortgage balance may decrease more slowly than expected.
If rates rise enough, you may reach what's known as your trigger rate.
What Is a Mortgage Trigger Rate?
Your trigger rate is the interest rate at which your scheduled payment is no longer enough to cover all the interest due on your mortgage payment period.
If this happens, unpaid interest may be added to your mortgage balance, depending on your contract. This is known as negative amortization, and it can cause the amount you owe to grow rather than shrink.
Your lender may require you to increase your regular payments, make a lump-sum payment, or switch to a fixed rate, depending on your agreement.
What Should You Do If You're in a Variable-Rate Mortgage and the Bank of Canada Increases Rates?
First, don't panic. A rate increase doesn't automatically mean you need to switch your mortgage to a fixed rate.
Instead, take these steps.
1. Confirm How the Rate Increase Affects Your Mortgage
Contact your lender or mortgage broker to confirm your new interest rate and when it takes effect.
Ask whether your regular payment will change or whether the higher interest cost will affect how much of your payment goes toward your principal.
If you have a fixed-payment variable mortgage, ask about your trigger rate and how close you are to reaching it.
2. Review Your Monthly Budget
Work out how the change affects your finances.
If your payment increases, look at your income, expenses, savings, and other debts to determine whether you can comfortably absorb the difference.
If your payment stays the same, remember that you may still be paying down your mortgage more slowly.
It's better to understand the impact now than to discover a problem at renewal.
3. Compare Your Variable Rate With Available Fixed Rates
If rising rates are making you uncomfortable, ask your mortgage broker to compare your current variable rate with available fixed-rate options.
Consider the potential payment, the remaining mortgage term, and any costs associated with changing your mortgage.
Also ask your lender whether you can convert your existing mortgage to a fixed rate and what conditions apply.
Keep in mind that converting doesn't necessarily mean you'll receive the lowest available fixed rate. You may have to accept the lender's offered rate, and the new rate could be higher than the variable rate you're currently paying.
5. Don't Wait Until Renewal to Ask Questions
If you're worried about your mortgage, start the conversation early.
Your lender or broker can explain how your mortgage works, help you review available options, and identify potential challenges before they become urgent.
If your mortgage payment is becoming difficult to manage, contact your lender as soon as possible rather than waiting until you miss a payment.
Is It Better to Switch From a Variable to a Fixed Mortgage?
There is no universal answer.
Switching to a fixed rate may make sense if you need payment certainty, your budget is becoming stretched, or you want protection against further rate increases during the new term.
Staying with a variable rate may make sense if you can comfortably manage payment changes, understand the risks, and value the flexibility of your current mortgage.
The decision should be based on your circumstances, the rates and terms actually available to you, and your ability to handle uncertainty—not simply on predicting what the Bank of Canada will do next.
No one can reliably predict every interest rate movement. A good mortgage decision is one that still works for you if the market doesn't move the way you expected.
Should You Speak With a Mortgage Broker Before Choosing?
Absolutely. A mortgage broker can help you compare fixed and variable options from available lenders, review important contract details, and understand how different choices could affect your budget.
Whether you're buying your first home, renewing your mortgage, or wondering if it's time to switch from a variable rate to a fixed rate, having a conversation before making a decision can help you feel more confident about your options.
You don't need to wait until you're ready to sign paperwork to ask questions.
Your mortgage should fit your life, not the other way around.
If you're unsure whether a fixed or variable mortgage is right for you, let's talk about your options and find a solution that aligns with your financial goals.
