Variable Rates Mortgage Holders Could Face 'Trigger Point' Increase in Payments

If you’ve explored purchasing a home in the past year or two, and secured a variable rate mortgage, you should be familiar with the term ‘trigger point’. If you are not, please reach out to your mortgage professional and read my take on it below. A variable rate mortgage, basically, has static monthly payments which protects you from fluctuations in the prime rate. Out of the 6 big banks, 4 offer fixed payments for variable rate mortgages and so do several credit unions. Based on the trajectory we’ve seen with the Bank of Canada and increasing the prime lending rate, we are scheduled for more rate increases in the fall. This may lead to an increase in your scheduled payments. If you secured a variable rate mortgage between spring of 2020 and early March 2022, when the prime rate was hovering around 2.45%, most likely the trigger rate/trigger point will come into effect for you. If you have a 30 year amortization, most likely you will feel the effect earlier than if you have a 25-year amortization.A static payment variable rate mortgage means that a homebuyer’s monthly payment is not meant to vary when the prime rate changes up or down.  This being said, we need to break an amortizing mortgage payment into two parts – the interest portion (which changes with prime) and the principal payment portion which is how your mortgage is paid down. When interest rates increase to the point that regular principal and interest payments no longer covers the interest charge, interest is deferred and the principal balance (total cost) can increase until it hits the Trigger Point. In essence, the lower your interest rate, the lower your trigger rate, the faster you may hit negative amortization.Check out this ‘trigger rate calculator’ to approximate your personal trigger rate - Of course, it’s always best to check with your financial institution to confirm your personal trigger rate. Always open to having a conversation over coffee, call me today!