The Bank of Canada has raised interest rates since March. While many homeowners expected rates to rise, no one expected things to go up so quickly.
These increases have a major impact on variable-rate mortgage holders since their lender’s prime rate will often mirror the central bank’s rate. That means variable-rate mortgage holders with a fixed payment will see the interest portion of their payments increase. For those on a fixed-rate mortgage, nothing changes since you would have locked in your interest rate when you signed your mortgage.
With more interest rate increases expected by the end of the year, many homeowners will likely hit their trigger rate unless they adjust their monthly payments
What is a trigger rate?
A trigger rate is the interest rate level where your lender can adjust your payment amount, even though it’s normally fixed. The trigger rate applies to variable-rate mortgage holders that are on a fixed payment schedule.
Variable rate mortgages have trigger rates to ensure home owners are always building equity with their payments, especially as interest rates rise.
With a variable-rate mortgage, the amount you pay is usually fixed. What changes is the amount of your payment going to interest. This interest rate will be affected by the central bank’s.
Generally speaking, the trigger rate is when your interest payments exceed your total payments.
For instance, if you are paying $2000 a month on your mortgage, only $200 might be going towards the principle with the rest covering interest. An additional increase to the interest rate, means that your interest portion will spike again and may actually exceed your total payment. When this occurs, it is called hitting your trigger rate
If you have reached your trigger rate, don't panic. You are certainly not alone and there are options:
- Adjust Your Payment: Firstly, you may choose to adjust your payment amount to ensure that you still have some going towards your principal balance.
- Review Your Amortization Schedule: Consider switching your amortization schedule from 20-year to 25-year which would be ideal if you already have equity in your home. However, if you're already at your maximum amortization for your lender (i.e. 30-year mortgage), you would need to increase your payment.
- Switch to a Fixed-Rate Mortgage: Many borrowers are now choosing to opt for a fixed-rate mortgage to avoid the issue of increased interest and trigger rates. Keep in mind, depending on your mortgage product, you may face penalties if you switch your mortgage mid-term. Be sure to discuss any mortgage changes with me before going ahead.
- Pay Off Your Mortgage: The final option that is always there is for you to pay off your mortgage entirely. Though don’t fret if this is not possible!
While I understand words like “inflation” and “trigger rates” can be scary am here for you. I would be happy to discuss any concerns you have or help explain in more detail how these changes may impact your mortgage and what your options are.