Before jumping into Trigger Rates, it’s important to understand the current rate environment and its impacts on the conventional variable mortgage holder.
Current Rate Environment
Over the last few weeks, all variable-rate mortgage holders have been trying to wrap their heads around the latest changes in interest rates and their effects on their mortgages. If you haven’t heard already, earlier this month the Bank of Canada raised the Prime Rate from its previous standing of 3.7% by a full percentage point. Bringing the new Prime Rate to 4.7%. Understandably, this has caused a ripple through variable-rate mortgage holders’ monthly payments. Roughly increasing your monthly payment by $57 per 100k borrowed since the last increase on July 13th. In addition to the multiple increases since January. For example, if your mortgage balance is $500,000 then your monthly payment will have increased by approximately $285 per month.
Variable Vs. Adjustable Rates
We have also written a blog about the differences between variable and adjustable mortgage payments. If you have a mortgage with TD, CIBC, RBC, or Vancity it is most likely that you have a variable rate— In comparison to an adjustable rate. Meaning that your payments are static, and they do not change with movements in the Prime Rate. Only the amount going towards interest and principal changes. Whereas an adjustable rate mortgage’s payments will change with movements in Prime.
However, what happens when the interest rate increases to a point where your payment is no longer going towards principal– or worse, can no longer cover the interest? Which brings us to today’s blog topic: What is a Trigger Rate?
What is a Trigger Rate?
When interest rates increase, the principal and interest amount may no longer cover the interest charged on the mortgage. The interest rate this occurs at is called the Trigger Rate. Since the last time Canadians had fast-rising rates was in the late 1970s, trigger rates have been largely ignored. Your rate, on average, would have to increase by more than 2% for you to start seeing it come into play. However, since January 2022, Prime has increased by more than 2.25%.
Increasing interest rates are pushing most borrowers closer to their trigger rate – a level at which their regular monthly payments will not be sufficient to cover the interest. Until inflation slows down, the rate is expected to continue to rise. For every mortgage holder, the exact triggering rate varies based on the size of their mortgage, the amount they pay each month, the interest rate on the mortgage and the length of the amortization period.
How to calculate your Trigger Rate
Each payment you make will affect your trigger rate slightly. Once it reaches the trigger rate, your payment will only cover the interest. If it goes over its trigger limit, your payment will no longer cover all of the interest. As a result, depending on the terms of your mortgage contract, you may either add the unpaid interest to your principal or increase your payments to cover it. You can make use of your annual prepayment privileges as a way to combat the lack of money going towards your principal in your mortgage payment. Another alternative is that you can pay off your mortgage faster by making a lump sum payment, or even rounding up your mortgage payments. Read our blog for more tips on paying off your mortgage faster.
Regardless, calculating your trigger rate can be dependent on a number of factors concerning the details of your mortgage. However, as your mortgage professionals, we are happy to take a look and help you with any questions you may have.
Want to find out more about your current situation?
If you would like to schedule a consultation, or simply want to give us a call, we are happy to help in any way we can. Even if it’s to provide a little peace of mind during these complicated times.
Contact Darcy Doyle at the Mortgage Professionals today by calling 604-889-7343 or send us an email at darcy@themortgageprofessionals.ca
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