There’s been a great deal of talk in the media lately about variable-rate mortgage borrowers hitting their so-called “trigger rate.”
Below, I’m going to explain what that trigger rate is, the preemptive steps if you are a variable-rate mortgage borrower you can take, as well as options if you have already reached that point.
What is a “trigger rate?”
It’s important to know this term applies specifically to those with a variable-rate mortgage that has fixed monthly payments.
In a rapidly rising rate environment, such as the one we’ve experienced this year, the trigger rate is reached when your entire mortgage payment is going towards the interest cost, with none going towards reducing your outstanding balance.
Those with an adjustable-rate mortgage, whose payments fluctuate as interest rates rise and fall, and those with a fixed-rate mortgage have no risk of this happening during the course of their term.
Why is it a big deal now?
The reason you’re hearing so much about trigger rates these days is because so many borrowers opted for variable rates when rates were at record lows during the pandemic.
Early this year, roughly half of all new mortgage borrowers were choosing variable rates. That means variable-rate mortgages now account for about one-third of all outstanding mortgages in Canada, up from about 20% in 2019.
The Bank of Canada estimates that roughly three-quarters of variable-rate mortgages have fixed payments.
And of those, about half have already reached their trigger rate thanks to the historic 350-basis-point rise in the prime rate in just nine months.
What steps can you take?
If you currently have a variable-rate mortgage with fixed monthly payments, you’ve no doubt seen the portion of your payments going towards the interest cost surge.
Rather than wait until you reach the point where none of your payment is reducing your principal balance, you should pre-emptively contact your lender to clarify your options.
If you have the ability, increasing your payment amount immediately will keep you ahead of the game and ensure a larger amount is going towards reducing your principal. This also applies to borrowers who may have reached their trigger rate and have already had to increase payments, since we’re expecting at least another rate hike or two from the Bank of Canada in the coming months.
Some lenders will allow you to extend your amortization or even have negative principal payments, but that may result in a significant payment increase at renewal time.
If you find all of this overwhelming, don’t worry, you’re not alone. Contact me today so we can review your financial situation and all of the options available to you.