What Happens when Your Mortgage Hits the Trigger Point?

August 23, 2022

Key points:

  • The trigger rate is when a variable-rate, fixed mortgage payment isn’t sufficient to cover the monthly interest expense on a mortgage, due to prime rate increases
  • When borrowers hit the trigger point, they usually have the option of increasing monthly payments, switching to a fixed rate, or make a lump sum payment

Some variable-rate mortgages are approaching the trigger point

If you have a variable-rate mortgage with fixed payments, there may come a point where your monthly payment won’t cover the interest expense on your mortgage balance, thanks to prime rate increases. This is called the trigger point. Here’s how it works, and what your options are.

Don’t feel like watching? Find the full transcript below!

Chris: [00:00:03] There are two different types of variable-rate mortgages. There are variable-rate mortgages that have payments that fluctuate both up and down with the prime rate. And then there are variable-rate mortgages that have fixed or locked in payments. Now, if you have one of those variable-rate mortgages that have fixed payments, then you want to pay attention. Because as the prime rate increases, there is a little thing called the trigger rate. The trigger rate is the point at which your fixed payment is not sufficient to cover the monthly interest expense on the balance of your mortgage. Let me explain with an example.

How does the trigger point work?

Chris: [00:00:46] Let’s assume you got a $600,000 mortgage between May of 2020 and March of this year, when the prime rate was at all time lows at 2.45 per cent. Assuming a 30 year amortization, your monthly payments would have been locked in at $2,055 per month, and the breakdown of that payment would have been approximately $1,332 being paid each month in principal and about $722 paid in interest. Now, let’s assume that the Bank of Canada this September will follow through on the 75 basis point increase that the market is anticipating. That will bring the Bank of Canada prime rate to 5.45 per cent. And as you can see in this same mortgage, the interest payments alone are $2,200 per month.

Three options when you reach the trigger point

Chris: [00:01:41] And what that means is that the original $2055 per month that you were paying is not enough to cover the interest, and therefore you’ve reached the trigger point. So what exactly will happen when you reach the trigger point on your mortgage? Well, that really depends on your lender. Each lender has their own unique policies, and they will communicate with you what those options are. But generally, there are three choices. The first is that you can make a lump sum payment to the balance of your mortgage so that the payment that you’re making is enough to cover both principal and interest. The second option is that they will give you the choice of converting from variable to fixed. You will now have a new fixed-rate payment and that will be an amortized payment. And the third option is that you can increase your ongoing monthly payments and remain in a variable-rate mortgage.

Need more help or information?

Chris: [00:02:41] Which of the three choices you prefer really depends on your unique circumstances. If you have any questions about the trigger point, how it’s going to impact you and your mortgage, I’m just a phone call or an email away. My name is Christopher Molder. I’m a Toronto based mortgage broker. And the door’s always open. Until next time. Bye for now.

You can book a call directly into my calendar below, or get in touch with me here.