What is a trigger rate?


Dear David,

We picked a variable rate mortgage last fall when we were arranging our financing. Now we are hearing about something called a “trigger rate”. How might that affect us? – TRIGGERED

DEAR TRIGGERED: Trigger rates affect some mortgage holders, but not others. If you’ve locked in your interest rate with a fixed-rate mortgage, you already know what your future monthly payments will be. With an adjustable-rate mortgage, your interest rate will rise and fall with Bank of Canada rate, but there is no associated trigger rate.

If you have a variable-rate mortgage with fixed or static payments, trigger rate is important. Most people didn’t know much about trigger rates until recently, but with the Bank of Canada raising interest rates seven times in less than a year, it has become a point of discussion.

A trigger rate is the interest rate level at which a lender can adjust the amount of your monthly mortgage payment. Trigger rates are applied to variable rate mortgages, so homeowners can continue to build equity with their monthly payments. As interest rates rise, some homeowners are becoming concerned that hitting the trigger rate will increase their cost of borrowing.

Fortunately, Canadians with variable-rate mortgages don’t usually see a change in their monthly payments because of trigger rates. Instead, they typically end up paying down more of the interest on their loan and paying off less of the principal (the original amount of the mortgage when they purchased their house). As the interest-to-principal ratio of their payments change, the overall length (aka amortization) of their loan is often extended.

The trigger rate is activated when a homeowner is no longer paying down any of the principal on their mortgage and is only paying interest. In practical terms, hitting the trigger rate means their mortgage is growing instead of shrinking, since their monthly payment no longer covers the amount of interest that is accumulating.

PRO TIP: Decades of statistics have proven that variable-rate mortgages offer better long-term value for the average consumer. The variable-rate model carries a certain amount of risk, and at this moment, many variable-rate mortgage holders are wishing they had locked into lower rates. Now is a good time to sit down with your mortgage advisor to discuss your risk tolerance. Interest rates are expected to come down, so before you lock in for a five-year term at the current rate, make sure you have the most up-to-date information. #Advice #AskDavid #TheNegotiator

David is a top-selling Broker in Kitchener-Waterloo Region. He works personally with you when selling or buying your home. Call or text today for your free home evaluation! 519-577-1212.