Understanding Mortgage Trigger Points
By Alisa Aragon-Lloyd, as seen in "New Home + Condo Guide" magazine, September 17, 2022
As the Bank of Canada keeps increasing the overnight key lending rate, there is more talk about mortgage trigger points. The question is, what does this and other mortgage-specific terms mean? Here are a few definitions:
• Variable-rate mortgage (VRM): When the prime rate changes, your rate changes. When interest rates change, typically, your payments will stay the same.
• Adjustable-rate mortgage (ARM): When the prime rate changes, your rate changes. Unlike a variable-rate mortgage, your mortgage payment will change when the interest rate changes.
• Trigger rate: When the interest rate increases to the point that your regular principal and interest payments no longer cover the interest charged, interest is deferred, and the principal balance (total cost) can increase until it hits the trigger point.
• Tigger point: When the outstanding principal amount (including any deferred interest) exceeds the original principal amount. The lender will notify you and inform you of how much the principal amount exceeds the excess amount (trigger point).
MORE RATE HIKES TO COME
Inflation has most likely reached its peak, yet we are still dealing with the effects before things balance out. Plus, there are still some final rate hikes expected to come between now and the end of the year from the Bank of Canada. It is important to be aware that because of this, many borrowers with variable rate mortgages will be getting near their mortgage trigger points. The payment with a variable rate mortgage is not designed to fluctuate with prime, yet it is important to remember that your mortgage payment consists of two components: your principal and your interest. This means that with the existing rate and further increases expected, the amount paid towards the principal decreases with an increase in the amount of interest being paid. For example, if your mortgage payment is $2,000 per month, only $200 goes toward the principal, while the rest covers the interest. An additional interest rate increase means that your interest portion will increase again and may exceed your total payment. When this happens, it is called hitting your trigger rate. This is how you can calculate your trigger rate: (payment amount x number of payments per year / balance owing) x100) to get your trigger rate in percentage.
WHAT HAPPENS IF BORROWERS REACH THEIR TRIGGER RATE?
If this happens to you, you won’t be the only homeowner who reaches their trigger rate and so it’s good to know what you can do to mitigate the situation.
1. You can adjust your payment: You can choose to adjust your payment amount to ensure
that you still have funds going towards your principal balance.
2. Review your amortization schedule: You can consider increasing your amortization period up to 30 years, as long as you have equity in your home. Increasing your amortization period means your mortgage payments will decrease. If you are unable to increase the amortization period, you will need to increase your payment.
3. Make a lump sum payment: Depending on your lender’s prepayment policy, you can make a lump sum payment up to 20 per cent of your original mortgage amount without paying a penalty.
4. Switch to a fixed-rate mortgage: Some borrowers are choosing to switch to a fixed-rate mortgage. However, if you switch to a fixed rate mortgage, the payments might be considerably higher compared to just adjusting your payments. It is always best to talk to a mortgage expert before deciding to make the change to explore your best options.
KNOW YOUR OPTIONS
While the terms inflation, trigger rates and trigger points can be intimidating, when you speak with a mortgage expert, they will be happy to discuss any concerns you might have and explain in more detail how these changes may impact your mortgage and what options are available to you.