Since the news broke that the Bank of Canada has raised the prime rates by 0.75%, bringing us up to a total increase of 3% since the beginning of 2022, there has been a lot of talk of trigger rates. Many predict that we will see more increases until inflation is back on target. With more interest rate rises expected by the end of the year, it is anticipated that many homeowners with variable-rate mortgages will hit what is known as their trigger rate. Let’s have a look at what trigger rates are and what you can expect.
What is a trigger rate?
Variable rate mortgage holders have what is known as a “Trigger Rate”. The trigger rate is reached when your entire mortgage payment goes towards the interest and none towards your principal amount. Variable rate mortgages have trigger rates built in to ensure that despite interest rate rises, homeowners are always paying off the principal amount of their mortgage and therefore building equity in their homes.
If you have a fixed or adjustable rate mortgage, there is no need to worry about trigger rates. Fixed rates are just that, fixed. The rate will not change until your mortgage term is over.
Adjustable rate mortgage holders similarly need have no concern over trigger rates as their rate and payment will automatically adjust along with the Bank of Canada’s prime rates.
What happens when you reach your trigger rate?
Typically when you reach your trigger rate, your lender will reach out to you with a couple of options so that you are always paying off your principal mortgage amount. Your lender may give you some of the following options:
Raise your monthly payment - By raising your payment, you will automatically be paying more towards your principal mortgage amount.
Raise your amortization - If you aren’t already at the maximum amortization for your mortgage, you may be able to increase the total lifetime of your mortgage. Doing this generally lowers your monthly payment but by keeping your payment the same, you will be able to pay off more towards your principal mortgage amount.
Switch to a fixed rate mortgage - Depending on your mortgage lender you may be able to switch to a fixed rate mortgage without having to pay a penalty. This is a good strategy to give you some peace of mind but be aware that it could cost you more in the long run and your monthly payment will likely increase.
Make a lump sum payment - The trigger rate is dependent on the remaining balance of your mortgage and so by making a pre-payment, you may be able to increase your trigger rate.
How to find out your trigger rate.
If you are a variable rate mortgage holder, you will be able to find your trigger rate by contacting your mortgage lender. Alternatively, we are happy to help you and as always, we can answer any questions or concerns you may have.