Trigger Rate And Trigger Point

Trigger Rate And Trigger Point Overview

Trigger rates occur on variable rate mortgages (VRM) with fixed payments (static payments).

When you signed your mortgage agreement with your lender, you opted for either an adjustable-rate mortgage (ARM), variable rate mortgage, or a fixed mortgage.

There are many benefits and risks when it comes to choosing a variable rate vs. fixed rate; one of the risks of a variable rate mortgage (with fixed payments) is reaching your trigger rate & trigger point.

Let’s simplify this concept!

A Trigger Rate, Explained

Your trigger rate is the point at which your mortgage payments are no longer contributing towards your principal balance (amount owing on your mortgage), and instead are only paying off the interest on your loan.

Not ideal.

But how can this happen?!

Simply put, when the prime rate increases significantly, the interest rate portion of your mortgage increases with it (but your mortgage payment remains the same). This results in less or no money being contributed towards your principal balance (balance owing on your mortgage).

If your variable interest rate increases to a certain threshold, the amount you owe towards interest may exceed and cannibalize your principal balance payments – resulting in a trigger rate.

Basic Example With Regular Interest Rates:

• Total Mortgage Payment $1000
• $300 towards your principal balance
• $700 towards your interest

Basic Example Where A Trigger Rate Is Met:

• Total Mortgage Payment $1000
• $0 towards principal balance
• $1000 towards interest

What Is MY Trigger Rate?

A trigger rate will be outlined in the terms of your mortgage contract, and it’s a completely different number for each borrower.

Your trigger rate is calculated slightly different by each lender, and will depend on your amortization period, interest rate, and term (all which contribute to the size of your monthly payments).

Keep in mind that your trigger rate may have altered slightly from the one in your original mortgage contract due factors such as pre-payments you’ve made towards your principal balance.

It’s wise to be ‘in the know’ of your current trigger rate so that you can plan appropriately for the future; connecting with a trusted licensed mortgage broker (such as myself!) is a great resource for learning about your trigger rate.

When your trigger rate is nearing or has been met, your lender or licensed mortgage broker may contact you to devise a plan to balance/adjust your mortgage payments.

Which Solutions Exist For Managing My Trigger Rate?

If your trigger rate is nearing, there are proactive paths you can consider to mitigate risks:

Depending on your trigger rate calculations, a licensed mortgage broker may recommend:

• Providing a lump sum payment which is large enough to balance out your interest payments (pushing your trigger rate further out of reach)
• Adjusting your static payments to a higher amount so that you can begin paying off your principal balance again
• Switching to a fixed rate (where the dramatic shifts of the prime rate won’t affect your mortgage)

What Happens If I'm Not Proactive In Managing My Trigger Rate?

Not doing anything about reaching your trigger rate may result in various outcomes:

1. If you’re approaching your trigger rate and the prime rate significantly drops, you may fall further away from reaching your trigger rate (phew!)
2. If you reach your trigger rate, your payments will no longer contribute towards your principal balance (which can affect how long it will take you to pay off your loan, yikes!)
3. If you pass the threshold for your trigger rate, you’ll face the risk of closing in on your Trigger Point (a big 'uh-oh')

Hold On, What’s A Trigger Point?

Your trigger point is the ‘point’ where you owe more money on your mortgage than you did when you first secured your mortgage loan (negative amortization).

Your trigger point is the next step after hitting your trigger rate.

Remember that your trigger rate is the point where your payments are contributing 100% towards your interest with 0% going towards your principal balance.

Your trigger point is where your mortgage loan becomes unsustainable, and any payments you make may be landing you further and further in debt.

Your trigger point is when timely action must be taken because the amount you’re paying towards your mortgage puts you at higher-risk for default.

Concerned About Reaching Your Trigger Rate Or Trigger Point?

It’s important to be aware of economic trends and forecasts which could affect your mortgage (especially if you’re about to renew or refinance your mortgage).

A licensed mortgage broker (such as myself!) can assist with valuable mortgage solutions which help mitigate risks of hitting your trigger rate or trigger point.

Managing your mortgage BEFORE it takes a turn for the worst can save you a lot of time, and money in the long-run!

Your Mortgage In GREAT Hands

If you’d like a helping-hand with your mortgage or have questions about reaching your trigger rate or trigger point, I’d love to help.

I’m Kyle Benzies (licensed mortgage broker); my expertise within the borrowing industry will provide you with the knowledge you need to feel comfortable with your mortgage journey.

I've helped many valued clients jump into better financial positions regarding their mortgage, even in times of economic uncertainty.

For a no-risk chat to discuss your trigger rate/trigger point, or to learn about my mortgage services, give me a call!

***other conditions may apply to anything listed above. The information provided on this page should NOT be implicitly relied upon, and may not be 100% up to date. It's best to contact us for the most current conditions/program offerings for first time buyers***