Frequently Asked Questions About Rate Increases
How does raising interest rates help to bring inflation under control?
Inflation happens when demand for goods and services outstrips supply (like it did coming out of the pandemic) and prices rise across the economy. By raising interest rates, the Bank of Canada makes borrowing money more expensive—and saving or investing money more rewarding—which slows spending and gives supply a chance to catch up with demand.
What’s the difference between a regular variable-rate mortgage and a fixed payment variable-rate mortgage?
When rates increase, the interest portion of variable-rate mortgage payments also increase. With a regular mortgage, this causes total payment amounts to go up. With a fixed payment mortgage, more of each payment goes toward paying the interest owing, and less goes toward paying the principal, keeping total payments the same.
What is a trigger rate?
When rates increase to the point where your entire fixed payment amount is going toward paying the interest owing (and none is going toward your principal), you’ve reached your trigger rate. Any interest owing in excess of each payment at this point is typically added onto your principal.
What is a trigger point?
If excess interest is added onto your principal long enough, you may end up owing more in total than you originally borrowed. This is called your trigger point, and reaching it usually requires that you make a lump-sum payment or bigger monthly payments, extend your amortization, or switch to a fixed-rate mortgage.