A mortgage trigger rate has been a concept for quite some time, but not one that would trend often. More recently, due to increasing mortgage rates, inquiries are now growing.
What is a mortgage trigger rate?
A mortgage trigger rate is a rate at which the bank will need to restructure your mortgage payment. This happens (or ‘triggers’) when your mortgage payment becomes interest only, and no principal is being paid (or your mortgage payment is no longer enough to cover the interest due each month).
For example, your monthly mortgage payment is $2500. Prior to rates going up, $1800 of each payment was going to interest and $700 of each payment was going to principal. However, due to the many rate increases that have taken place since obtaining this mortgage, the interest on your mortgage is now $2550. This is where a mortgage trigger rate will apply, as your interest now exceeds your regular monthly mortgage payment. Your payment always needs to cover the interest due to the bank – otherwise, your mortgage will start growing as opposed to shrinking over time!
What is the ‘actual rate’ that will be considered my mortgage trigger rate?
This depends, as it will be different for everyone. Since rates fluctuate frequently, it depends entirely on what your mortgage rate is vs. what the prime interest rate is at the time of the trigger. Your mortgage rate won’t be the same as someone who took a mortgage 6 months prior to you… and vice versa. One way to calculator your trigger rate is:
(Mortgage Payment Amount X number of Payments per year / Balance owing on mortgage) X 100 = Trigger rate
Do mortgage trigger rates apply to all types of mortgages?
No. Mortgage trigger rates apply only to variable-rate mortgages – NOT fixed-rate mortgages.
Do mortgage trigger rates apply to all variable mortgages?
No. There are two types of variable-rate mortgages. Traditional variable rate mortgages have static payments. Rather than payments increasing as rates increase, payments will stay the same, and rather, the division of principal and interest will change accordingly. On an Adjustable-Rate Mortgage, however, payments will change with each rate change. Therefore, if you have an Adjustable-Rate Mortgage, you will not experience a mortgage trigger rate.
Can I prevent my mortgage from hitting the trigger rate?
Yes. You can prevent hitting the mortgage trigger rate on your variable mortgage in 1 of 3 ways:
- Manually increase your payments so you are paying more than interest
- Pay a lump sum towards principal which will decrease how much of your payment is going to interest
- Convert your variable into a fixed rate
For more in-depth conversations on trigger rates, you can call us at (905) 455-5005.