How close is your trigger rate?

If you have static payments for your variable rate mortgage, your trigger rate (and trigger point) are lurking ahead.

What is the trigger rate for your VRM product? It's different for every mortgage, and it may have changed. Here's how you find it, and what it means for your payments (and rate savings).

Are you a THINK Financial client? You have an ARM product which doesn't have a trigger rate.
Some big banks offer VRMs, which do contain a trigger rate.

August 25, 2022
Dashna Joya
, True North Mortgage Broker

Caution ahead! Your trigger may be just around the corner.

A year ago, no one was concerned about a Trigger Rate for their VRM product (Variable-Rate Mortgage) because rates were so low.

With recent (large) rate increases, more of my clients are worried about hitting theirs. At your trigger rate, your static payment no longer covers the full interest amount. Nothing is going to your principal, and any deferred interest is now being added to your mortgage balance. At this point, the lender will contact you to raise your payment (among other options).

Knowing your trigger rate can be illuminating for many reasons:

  • Understand how your static payments work to pay down your mortgage.
  • Have a plan if you reach your trigger rate and the lender contacts you with options.
  • If you should be proactive and make adjustments before hitting your trigger rate to protect your variable-rate savings.

Let's dive into WHY you should know your trigger rate.

Whatis Trigger Point Mortgage2

What a 'trigger rate' means for your payments

For your VRM's static payments (read more about an ARM's floating payments here), your payment amounts are set at the beginning of your term. The interest and principal portions are based on your variable contract rate (including lender discount) and amortization schedule.

If variable rates go up, so does your interest portion, with less going to the principal (read that as 'your amortization is ticking up'). But as you can see, you're paying less and less down on principal well before you hit your trigger rate.

So, hitting your trigger rate is your payment's 'last gasp' in that it no longer works for your mortgage terms, and the interest portion has consumed your entire payment.

What is your trigger rate?

It's actually different for each of my clients who have a VRM product, based on their mortgage rate and terms. And each big bank has its own way of calculating trigger rates.

You're more likely to hit your trigger rate sooner if you locked in when variable rates were at rock bottom — before the Bank of Canada started their latest rate-hike cycle.

One of the big 6 banks recently surmised that about 80,000 of its variable-rate mortgage clients will reach their trigger with the next "couple of” Bank of Canada rate hikes (Stueve Huebl, August 24, 2022).

Your Trigger Rate should be somewhere in the mortgage contract you signed at the beginning of your term. However, things may have changed. Have you made any pre-payments to your principal? If you have, the trigger rate may have moved. It's best to know your current trigger rate, especially during times when rates are going up.

There are a lot of calculations and calculators out there, but the best strategy is to talk to your expert True North Mortgage broker. We'll help you pinpoint your trigger based on your product and lender — and offer you targeted options and advice based on rising rates.

Plus, if we determine that your amortization is gaining steam too fast with recent rate hikes, now is the time to take a look and devise a plan to keep your mortgage savings on track down the line.

Your trigger rate options — do you have a plan?

Once you know your trigger rate, if you wish to wait for the lender to contact you to take action, we can plan out what works best for you.

Your lender will likely provide options to:

  • Increase your payment
  • Pay a sufficient lump sum to make your current payment workable again
  • Switch to a fixed rate (again, higher payment)

We'll run the budget and mortgage numbers, and you can decide which action works best for your situation.

Should you increase your payments before you hit your trigger?

As we noted in the above graphic, you pay less principal with each increase before your trigger. Paying less towards your principal means your amortization is getting longer. Even if you don't hit your trigger rate, you may be in for quite the 'payment hike' surprise when it comes time to renew.

Let's look at an example. One of my clients bought a home with a VRM right before the Bank of Canada started rate hikes in early March 2022. Their mortgage balance now is just over $448K, with a variable-rate discount (off prime) of 1.05% (the current prime rate is 3.8%), and an original amortization of 30 years.

Including all the recent, large rate hikes, if they don't make a payment adjustment and rates don't go down before the end of their 5-year term (in 2027), their amortization will double to around 60 years.

Essentially, that will likely at least double their payment at renewal, to bring their amortization back to 25 years. If they take action now to raise their payments or pay a lump sum, they can avoid the coming 'shock' to their budget to keep their mortgage savings and amortization on track for their next term.

What happens if you don't trigger action — and you reach your trigger point?

Some of my clients, for example, who own rental properties, are fine with waiting for the trigger rate to set any payment changes in motion. However, the risk is getting caught in the lender's (mortgage) headlights once again by next hitting your Trigger Point.

The trigger point for a Variable-Rate Mortgage (VRM) is when your mortgage principal balance exceeds the original amount of your loan — which can happen if you aren't paying enough interest and it's deferred to your balance.

Again, the lender will contact you to make a change, such as higher payments, pay a lump sum or switch to a fixed rate — with a finite deadline, usually 30 days. The home can also be re-appraised to determine its Fair Market Value in relation to your loan percentage of the home's price.

This trigger-point marker is an even bigger deal than your trigger rate. The lender is now at higher risk for carrying your mortgage loan, and the next fall-down is mortgage default.

Prepare for what's up the (mortgage) road.

So, while it may seem easy with a busy schedule to wait for the lender to contact you when you hit your VRM's trigger rate, it's not the best strategy for staying on top of your mortgage savings goals. Even if you don't hit your trigger rate, you're still better off knowing how your static payments may affect your future budget and financial plans.

Talk to us! We're highly trained with the experience and service focus to help you navigate the (mortgage) road — and ride out into the sunset while saving thousands on your mortgage.

We're here for you, anywhere you are in Canada — online, over the phone or at a store location. Give us a shout! You'll get 5-star service and an easy process to make clear decisions.

A dark (mortgage) road ahead? We light the path for more savings.