The Bank of Canada (BoC) has been increasing it's target overnight rate significantly over the past 12 months, meaning many home owners with a variable rate mortgage (or renewing their fixed-rate) will have a substantial increase in their monthly mortgage rates. As discussed in our previous article, some variable rate mortgages rates can increase to the point where the mortgage payment no longer covers the interest portion of the loan. This is when the Trigger Rate kicks in, the term we will be covering in today's article.
A Trigger Rate is the interest rate at which the interest portion of a mortgage payment equals, leaving zero portion of the payment being applied towards principal (the loan is not being paid down). Therefore, triggering a higher mortgage payment as the interest portion on the loan increases beyond the original payment amount.
The trigger rate is typically set at a certain percentage above the initial interest rate on the mortgage, and it is used to determine when the lender is allowed to adjust the interest rate. For variable-mortgages with fixed payments, once this individualized rate is "triggered", then your payments would increase to be able to cover the increased interest on your loan.
Trigger rates apply to variable mortgages with fixed payments only. On the other hand, variable-rate mortgages with variable payments (aka adjustable rate mortgages) have their payments adjusted (in this case increased) with every rate hike announced.
According to your mortgage contract, you may also have the option of making a lump sump payment to keep your monthly payments fixed before or when the trigger rate is reached. Trigger rates can vary depending on the terms of the mortgage contract and the lender's policies. So, it's important for you - as the borrower to understand the terms of the mortgage contract so you can anticipate any potential changes to loan payments.
We hope this article helps you, the homeowner or homebuyer, navigate through the mortgage process smoothly and with better understanding.