Mortgage Trigger Rates And Trigger Points

From March 2022 to January 2023, there have been consistent rate hikes from the Bank of Canada (BoC), increasing the prime rate from 2.45% to 6.7%. This is a major concern for people with a variable rate mortgage as they have seen their rates essentially triple in this timeline, inching closer and closer to their “trigger rates”. It's important to note that fixed rate mortgages and not every variable rate mortgage borrower needs to worry about trigger rates – I’ll cover this below. 

Mortgages consist of principal and interest amounts within each payment. The principal is the balance owing on your mortgage, while interest is the portion of your payment that goes towards the lenders fee for lending you the money. The lenders fee is directly related to the Bank of Canada’s prime rate – when the BoC increases the prime rate, your mortgage interest rate increases as well. Therefore, your monthly mortgage payments will rise. Within a variable rate mortgage, there are two payment structures – fixed payments and adjustable payments. If you have adjustable payments, your payments will vary to cover both interest and principal, therefore you do not have to worry about trigger rates. If your payments are fixed within a variable rate, that means that the amount of principal and interest will not be adjusted as rates change. If your mortgage rate increases, a higher portion of the payment goes towards interest and a lower portion goes towards the principal. This then leads to a longer timeline to pay down your mortgage. 

So what is a trigger rate? 

Trigger Rate: When the entirety of your mortgage payment is going towards interest, and none towards the principal amount. Therefore, the cost of borrowing is not covered by your current payments, and you’ve entered negative amortization. 

Negative Amortization: Your regular payments do not cover the interest portion anymore and the difference will be added back to your mortgage balance. In other words, the amount you owe increases as does the amount of time it will take to pay off your loan. 

Once a trigger rate is hit your lender will likely contact you making you aware of this and provide you with some options of how to proceed. It is in my opinion that if you can increase your monthly payments at this point to do so. This will halt the increase of the amount owing and put you back on the right path to paying down your mortgage, rather than increasing it. Should you choose to stay consistent with your original monthly payments you’ll be at risk of hitting your trigger point. 

Another trigger? What’s a trigger point? 

Trigger Point: There is no one rule for reaching the trigger point of a mortgage, it’s more case by case situations and often times outlined within your mortgage contract. The general guideline is that once your current mortgage balance exceeds the original amount borrowed, the trigger point will be activated. This means that your lender will no longer allow you to carry on with your original monthly payments, and a new solution is mandatory. No solution is better than the other, it depends on the borrowers current circumstances. Lenders may give you the option to: 

- Increase monthly payments 

- Convert to a fixed-rate mortgage 

- Make a lump-sum payment 

- Increase your amortization 

Here is a visual of what was covered above to make things a little more digestible:

With the Bank of Canada continuing to increase the prime rate, trigger rates and trigger points are essential for Canadian mortgage borrowers to be aware of, especially if you are on a variable rate with fixed payments. If you are nervous about hitting either of these triggers it is a good idea to speak with a mortgage agent (like myself) to help you work through your options and stay on top of your mortgage.  

Book your meeting with me today to discuss your options by clicking here.