Everything You Need To Know About Trigger Rates
If you’re looking for a mortgage in Canada and you’ve done some research, chances are that you have come across the term “trigger rate.” This phrase can be confusing, but don’t worry – understanding your trigger rate is actually quite simple!
In this article, we’ll take a look into the meaning of this phrase and we’ll provide some helpful tips on managing your trigger rate to ensure you get the best deal possible. So join us as we dig deeper into this essential topic and learn everything there is to know about trigger rates in Canada!
What Is A Trigger Rate?
In the simplest terms, a trigger rate is the point where your entire mortgage payment is going towards the interest amount, and none of it is being applied to the principal balance. What happens (the trigger) is that your balance owing would actually increase, which takes you into negative amortization (more on that below).
Trigger Rate Calculator
How Does The Trigger Rate Work?
To avoid any nasty surprises when the lender’s prime rate fluctuates, a variable-rate mortgage will often offer fixed payments, depending on the financial institution. This means that instead of your monthly payment going up and down, you’ll pay the same amount.
Now, if you have adjustable payments on your variable rate mortgage, you’re in the clear. If you’ve got a fixed rate mortgage, you also have nothing to worry about.
However, those with fixed payments would need to be concerned if interest rates rise. With a fixed payment plan, the percentage of your monthly payment applied towards the principal versus the interest will be adjusted.
If the interest portion continues to rise, eventually more and more of your regular mortgage payment will go towards interest, and the amount of time it’ll take to pay off your loan will increase. Once your monthly mortgage payment is no longer able to cover the amount of interest owed from the previous payment, your loan has hit the trigger rate.
How Is The Trigger Rate Calculated?
The trigger rate is calculated based on the current prime rate and your loan’s amortization period. The Bank of Canada generally sets the country’s prime rate and mortgage lenders use this to adjust the interest rates they offer their customers. Your lender will then consider your mortgage terms, including when you took out the loan, the current mortgage rate, how much you owe and your loan’s amortization period before giving you a trigger rate.
While the exact way the rate is calculated can vary, a good rule of thumb is to get your annual payment total, divide it by your current mortgage balance and multiply by 100 for the percentage.
An example would be:
$1,700 per month x 12 months = $20,400
$450,000 = mortgage balance
$20,400 / $450,000 x 100 = 4.53%
What Happens When I Hit The Trigger Rate?
Once you hit your trigger rate, what happens next depends on your lender and the specifics of your mortgage contract. Some may raise your payments, while others allow for negative amortization – wherein interest costs are permitted to exceed the total mortgage repayment. In this case, principal payments become a negative number and as a result, the balance owed on the mortgage will accumulate over time.
How Can I Avoid Hitting My Trigger Rate?
It’s important to review your mortgage terms and understand when you could hit the trigger rate. This will help you to plan ahead and avoid surprise costs.
There are only two surefire ways to avoid getting to this spot; one is to increase the size of your payments. This will allow for more coverage on your principal balance, thus helping you avoid your trigger rate.
The second is to switch to a fixed-rate mortgage. It’s true that switching will most likely mean a higher payment for you, it also means more stability and means you won’t hit your trigger rate.
So let’s talk about the next steps if you do end up hitting your trigger rate. Because while you don’t actually have to do anything, it’s not a place you want to sit. As mentioned, with negative amortization, your principal balance will continue to increase. And that takes you to your trigger point, which is something different but closely tied to your trigger rate.
What is The Trigger Point?
If you’ve hit your trigger rate and haven’t taken any further action, eventually you’ll reach your trigger point. This is when financially, you’re no longer able to continue with your current monthly payments. This should all be laid out in your mortgage contract.
Basically, it means the balance left owing on your mortgage reaches a point where it now exceeds the original borrowed amount.
In some cases, the property’s value is the defining term. If your mortgage balance hits an amount that exceeds your home’s appraised value, that could also be considered your trigger point.
What Can I Do If I Hit The Trigger Point?
If you hit the trigger point on your variable-rate mortgage, it can be a stressful situation. But there are steps that you can take to ensure the problem is manageable and doesn’t cause too much of an impact on your finances. Here are some ideas to get you started:
- As mentioned above, increase your monthly payment amount. If possible, try switching to bi-weekly or -monthly payments to help get your interest amount down faster.
- Research other options like extending your amortization period or other mortgage lenders who may be able to offer you a better deal.
- If you have some spare cash, consider making a lump-sum payment (if your mortgage lender allows this) to bring down your mortgage balance.
- Consider making a switch to a fixed-rate mortgage.
What Else Should You Know About Trigger Rates?
It’s important to understand that your monthly payments are always based on the prime rate, however, they will remain the same until your trigger rate is reached. This means that if the prime rate rises or falls, it won’t affect your payments until the trigger rate is hit.
It’s also important to know that you can negotiate the terms of your loan, including the trigger rate with your lender. This could be beneficial if you want a lower mortgage payment or longer loan repayment term and can help you avoid having to make higher payments if interest rates rise. It’s also worth talking to multiple lenders to see if they can offer you a better trigger rate or terms on your loan.
Finally, it’s important to keep an eye on the prime rate and be aware of when your trigger rate is approaching so you can adjust your finances accordingly. This will help ensure you don’t end up with higher payments than expected or run into any financial difficulties.
Understanding your trigger rate is key to getting the best deal possible on your mortgage and will help you manage your finances more effectively. By having a better understanding of how it works, you can ensure that you’re prepared for whatever changes might come up in the future and get the most out of your loan!