A borrower has a variable rate mortgage with fixed payments. After several Bank of Canada rate increases, the payment stopped covering the interest, and the unpaid interest added to the balance has now pushed it past the trigger point in the mortgage contract. What happens next?
Correct Answer
A) The borrower must raise payments or pay a lump sum
At the trigger rate, the fixed payment covers only interest; above it, lenders generally add the unpaid interest to the balance, which is negative amortization. Once the balance reaches the trigger point set in the mortgage contract, the lender will require the borrower to act, typically by increasing the payment or making a lump-sum prepayment so the mortgage can again be paid off within its amortization.
Why This Is the Correct Answer
This answer is correct because once the balance passes the trigger point in the mortgage contract, the lender no longer lets unpaid interest pile up. FCAC explains that at the trigger point the lender may increase the payments so the mortgage is paid off by the end of the amortization. In practice the borrower must raise the payment or make a lump-sum prepayment to bring the balance back in line.
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A borrower with a variable rate mortgage experiences a significant rate increase. Their payment remains the same but now only covers interest. What has occurred?
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A borrower's mortgage payment increases beyond their ability to pay due to interest rate changes. The lender agrees to extend the amortization period to reduce monthly payments. What risk does this create for the borrower?