RBC sees rate hikes triggering bigger bills on 80,000 mortgages

Bloomberg

Royal Bank of Canada (RBC) said interest-rate hikes may trigger higher monthly payments for about 80,000 customers with variable-rate mortgages.
The increases will average about C$200 ($150), a level the lender expects most borrowers can afford, and most of Royal Bank’s variable-rate mortgage customers won’t hit those trigger rates. Less than 0.5% of customers will require so much as a phone call to discuss the changes, Chief Risk Officer Graeme Hepworth said on the Toronto-based bank’s fiscal third-quarter earnings call.
“We can see the capacity in the vast, vast majority of that 80,000 mortgage customers, and communication will start to go out,” Hepworth said on the call.
For many variable-rate mortgages in Canada, the total monthly payment remains constant as interest rates rise, with the portion allocated to interest growing and the part dedicated to paying down the principal shrinking. But periods of large, rapid interest-rate hikes can trigger larger monthly mortgage payments because banks aren’t allowed to let the portion covering principal vanish completely.
Variable-rate mortgages made up a growing portion of Royal Bank’s new mortgages this year and last, but they still account for less than 35% of the bank’s portfolio, Hepworth said. Customers with fixed-rate mortgages will face the impact of higher interest rates only when they renew the loans and will face “a relatively modest increase if rates continue to rise,” he said.
Customers with fixed-rate mortgages in Canada are typically able to lock in their interest rates for only three to five years, then are required to renew the loans, compared with terms as long as 30 years in the US. About 17% of Royal Bank’s mortgage balances will come up for renewal by the end of 2023, the company said.