What Is a Mortgage Trigger Rate?

Whether you're considering purchasing a mortgage or already have one, you may wonder: what is a mortgage trigger rate? This is a common question I hear, especially with the rate changes we’ve seen with the Bank of Canada. With that said, here’s a guide to help you understand what a mortgage trigger rate and point are and what you can do to protect yourself. As a mortgage broker, I can guide you through these definitions and offer you my professional advice about your mortgage situation. 

Defining Mortgage Trigger Rate

A mortgage trigger rate in Canada is the interest rate on a variable-rate mortgage with fixed payments that create negative amortization. In other words, negative amortization is the increase in your overall loan amount due to the failure to cover the interest. Under normal circumstances, a portion of your mortgage payment goes to interest, and the rest goes to the principal (the outstanding mortgage balance without interest).

Paying the principal is what creates equity in your home. Your equity is your personal stake in your property, and many people use it to move to a more expensive house, borrow money for home improvements or refinance their mortgages. When you reach your trigger rate, you lose the equity in your home every month instead of gaining it. This is because your monthly payments contribute more toward interest than your principal amount.

Mortgage Trigger Rate vs. Mortgage Trigger Point

While many people use these terms interchangeably, there is a slight difference between your trigger rate and trigger point. A trigger rate is the interest rate that causes you to fall short of your interest each month. A trigger point is when you can no longer carry on with your payment strategy — your lender will likely demand you take action to make up the difference.

How Trigger Rates and Trigger Points are Calculated

To better understand how these figures are calculated, here’s a formula and an example:

Trigger rate = [(Mortgage Payment) x (Number of Payments Per Year) / (Mortgage Balance)] x 100

Let’s say you pay $1,500 per month. Multiply this by 12 months to get $18,000. Next, divide that by the principal on your home left to pay (mortgage balance). In this example, let's use $200,000. This comes to 0.09. Multiply this decimal by 100 to get 9%. That means if you're paying $1,500 each month and owe $200,000 on your house, you cannot cover your monthly interest once your adjustable rate exceeds 9%.

Keep in mind that this is an estimate, and other factors may impact your trigger rate. If you use this calculation, however, you should come close to your real trigger rate. Your lender may have specific criteria for when you hit your trigger point and should provide advance warning if you get close.

What Happens if I Reach My Trigger Rate?

The first thing that happens when you get to your trigger rate is that you begin to lose equity in your home. Your lender typically won't allow you to continue making payments that don't cover your interest, so you may need to make a lump sum payment or higher monthly payments.

If you're unable to pay more each month or invest a large amount of money into your equity, some lenders may allow for negative amortization, where unpaid interest is added to your principal amount. However, not all lenders offer this option, so it’s important to reach out to understand the consequences ahead of time so that you have an opportunity to act.

What to Do If You Reach Your Mortgage Trigger Point

There are several options to consider if you hit this point and need to change your payment strategy. Aside from making a lump sum payment, you can:

• Pay more than your regular payment within acceptable limits to create more equity in your home. 
• Get a fixed-rate loan to avoid the effects of rate hikes on variable mortgages. 
• Refinance your mortgage. If you've had your loan for more than five years, ask me about refinancing, and we can look at options for locking you into a new rate with a payment that won't fluctuate with the market.

Other Ways to Protect Yourself from Trigger Rates or Points

If you're looking for a home right now, you might consider purchasing a fixed-rate mortgage for more certainty. Many people who've taken out adjustable and variable-rate mortgages tend to be worried about rising interest rates. You can avoid this entirely by locking in your mortgage and refinancing when you can secure better interest.

If you're concerned about rising interest rates or reaching your trigger point, reach out to me to learn more about your options. I can provide actionable advice and help you explore different mortgage options to suit your needs and current situation.