Adapt and Thrive Tips: What is the trigger rate and how to manage it?

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If you are in a variable rate mortgage product today where the payment has been fixed and stable during the rising rate environment that we’ve been experiencing, then you need to pay close attention to something called the trigger rate. You will usually find your trigger rate in the credit agreement you signed with your lender at the time you arranged the mortgage. Most probably this agreement is sitting in a drawer or on a shelf somewhere collecting dust. Now is the time to find it because this term trigger rate is coming into the spotlight for a reason. It’s because we’ve just come out off historically low interest rates and the Bank of Canada has been increasing the overnight rate driving prime rates up at a very fast pace. A pace that is faster than anyone expected. What happens with a variable rate product is that the payment stays fixed and when the rates rise the payment is protected but the allocation of what goes towards interest versus principal beneath the surface changes…until that payment no longer covers the principal pay down.

The trigger rate is different from one person to another depending on when you took your variable rate mortgage. The trigger rate will be different depending on:

  1. When the mortgage started (the closer the start of your mortgage to March 2nd 2022, the more likely you are near the trigger rate now).
  2. The discount to Prime you have arranged with your lender (e.g. Prime -1% or  -0.5%)
  3. Whether you have made any payments towards principal above and beyond the static variable payment stated in the mortgage agreement.

The best way to figure out your trigger rate is to check your mortgage statement online to see how much of your payment is currently going towards principal versus interest, especially after the latest increase in September. It is best not to wait until you receive a notification from the bank. If you haven’t received that notification from the bank then you are likely paying very little principal right now and you may hit that the trigger rate after the next rate increase scheduled for October 26th.

What happens when you hit this trigger rate? The bank will normally notify you and suggest increasing your payment.

If you chose not to act, when there is a monthly shortfall, the difference would be added back to your principal balance each month. During this period the lender may notify you suggesting that you increase payments to maintain your original amortization schedule but it is normally a suggestion (not a requirement). At some point the principal balance may increase back to the original mortgage amount and that is called the trigger point. Once you reach the trigger point, the lender may reset your payment to ensure it covers your interest on a monthly basis.

When you reach this trigger point the bank will ask you to do one of three things:

  1. Make a lump sum payment against the loan amount to bring down the balance owing
  2. or convert to a new fixed rate. I do not recommend taking anything about above a 1 or 2 years fixed term right now because if you lock into a 5 years fixed right now, you are locking into what is likely to be the height or near height of the rate increase cycle.
  3. or increase the mortgage payments to pay off the outstanding principal balance within the remaining amortization of the original mortgage

It is best to be pro-active and not wait to receive a trigger point notification, that way you can plan ahead, identify your options, and see which one is better for you. You want to avoid rushing into a decision, making large lump sum payments or locking into a long term fixed rate mortgage when better options are available. Another option is to consider what’s called an adjustable variable rate mortgage, where your payment changes as the rate changes. Myself and my team can help you with the math on this option to see if it makes sense under different interest rate scenarios.

If you have reached or are close to reaching your trigger point or you are in an adjustable rate product and you are concerned about the next Bank of Canada rate increase that is very likely to happen on October 27th of 2022, myself and my team would be happy to help you explore your options and guide you through given your financial situation. Every situation is different feel free to reach out to us at info@streetwisemortgages.com for the right advice for YOU.

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