The Trigger rate; and What is it?
The dramatic leap in prime rates of lenders has prompted public concern about mortgage borrowers reaching their “trigger rate.”
Let us simplify this for you…
For fixed-rate mortgage, nothing will change until it’s time to renew. But in case of a variable-rate mortgage, these rate hikes have a direct and immediate effect – and you could be at risk of reaching your trigger rate.
A tale of two triggers
There are actually two triggers at risk of being pulled: your trigger rate and your trigger point.
Hold your horses, we’re making it easy for you to understand!
There are two parts of a mortgage payment: principal and interest. The principal is the portion of your payment that goes toward your balance owing, while interest is the bank’s fee for letting you use their money.
Many lenders offer variable-rate mortgages with fixed payments. Instead of changing the size of your payment every time the prime rate changes, your lender will continue to collect the same amount and allocate a larger or smaller portion of your payment to interest.
If you have a variable-rate mortgage with adjustable payments, you have nothing to worry about. But if your variable-rate mortgage has fixed payments, rising interest rates can cause trouble. As your mortgage rate rises, a larger portion of your payment is put toward interest and a smaller portion of your payment goes toward principal. The trade-off for not increasing your payment is that it will take longer to pay off your mortgage.
What is the trigger rate?
To explain this in a simplified manner, your entire mortgage payment is going to interest and none of it is going to your principal. This is the first of two triggers you can reach.
When you reach your trigger rate, what’s actually being “triggered” is an increase to your balance owing. Because your regular payment is no longer enough to cover the cost of borrowing, the entire payment is applied to interest. Any amount still owing is termed deferred interest and added to your balance to be paid sometime down the road.
What happens when you reach your trigger rate?
Your lender or mortgage broker will likely give you a courtesy call to let you know your payments are no longer big enough to pay down your mortgage. They’ll explain your options and help you reach an informed decision about how to proceed.
With every month that passes, you’ll owe more and more money on your home. Your rising balance will demand a rising interest payment, making the problem worse as time goes on.
If it’s at all possible, increase the size of your monthly mortgage payment well before you reach your trigger rate. Otherwise, you risk reaching an even worse threshold: your trigger point.
But wait, what is the trigger point?
Your trigger point is the time at which you can no longer carry on with the same monthly payment you’ve been making.
It will be spelled out in your mortgage contract.
A common trigger point is the time when the balance owing on your mortgage exceeds the amount you borrowed in the first place.
Your trigger point could also be described as a percentage of your property’s value. For example, you could reach your trigger point when your mortgage balance exceeds 100% of your home’s appraised value.
Mortgage, or make a lump-sum payment to bring down your balance.
To conclude…
Rising interest rates have a real effect on variable-rate mortgages that could have lasting implications for your financial health. And remember to not hesitate to increase your regular payments to stay ahead of rising rates.
