What is a trigger rate?
Only a portion of variable-rate mortgages have a trigger rate. Find out what a trigger rate is and how it can affect your mortgage payments.
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A trigger rate is a feature of variable-rate mortgages with fixed payments. As interest rates rise, a larger portion of each payment goes toward paying interest on the loan, and a smaller portion goes toward the mortgage principal (the amount borrowed). The trigger rate is the interest rate at which the interest portion of a mortgage payment doesn’t cover the interest accrued since your last payment. When this happens, the additional interest is added to the amount you owe. When your trigger rate is reached, there is a change in the direction of your debt repayment. Instead of shrinking over time, your mortgage amount increases, a situation called “negative amortization.”
The trigger rate is calculated as a function of the mortgage’s term to maturity and the initial rate stated in your mortgage contract, which fluctuates according to the terms of the contract.
A second type of trigger, referred to as the trigger point, refers to a specific condition that will trigger an increase in the amount of your mortgage payment. Depending on the terms of your mortgage, your trigger point may be when the outstanding balance grows back to its original amount, or when the loan reaches a certain percentage of your home’s appraised value.
Fixed-rate and variable-rate mortgages with adjustable payments do not have trigger rates or trigger points.
Example:“Monica’s mortgage had a trigger rate of 5.5%, so when interest rates started rising rapidly, she converted to a fixed rate to avoid the risk of hitting her trigger point and having to make larger monthly payments.”
Read more on mortgages and trigger rates:
- The best 5-year variable mortgage rates in Canada
Five-year variable-rate mortgages offer potential cost savings to buyers who can manage changes in market interest rates. Here’s how to know if they are for you. - Compare today’s best mortgage rates
Use the mortgage rate finder to compare current mortgage rates from the big banks and brokers instantly. - Making sense of the markets this week: December 11, 2022
What’s up with the Bank of Canada recent interest rate hike? (Are we there yet?) Also, bonds are back and CEOs are using the “R word.”
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