Let’s start with a few definitions:

  • Variable Rate Mortgage (VRM) – prime changes, rate changes. When interest rates change, typically, your mortgage payment will stay the same. 
     
  • Adjustable Rate Mortgage (ARM) – prime changes, rate changes. Unlike variable rate, your mortgage payment will change when interest rates change.
     
  • Trigger Rate – When interest rates increase to the point that regular principal and interest payments no longer cover the interest charged, interest is deferred, and the principal balance (total cost) can increase until it hits the trigger point. 
     
  • Trigger Point – When the outstanding principal amount (including any deferred interest) exceeds the original principal amount. The lender will notify the customer and inform them of how much the principal amount exceeds the excess amount (Trigger Point). The client then typically has 30 days to make a lump-sum payment; increase the amount of the principal and interest payment; or convert to a fixed rate term. 

While static payment variable-rate mortgages (VRM) are not designed to fluctuate with the Prime rate, the reality is that a mortgage payment consists of two components: your principal and your interest. With the existing rates and subsequent increases, the amount paid towards principal will decrease with an increase in the amount of interest on a static mortgage. For instance, if you are paying $2000 a month on your mortgage, only $200 might be going towards the principal 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.

You can calculate your own trigger rate with the following formula: (Payment amount X number of payments per year / balance owing) X 100) to get your trigger rate in percentage.

If you have reached your trigger rate, don’t panic. You are certainly not alone and there are options:

  1. Adjust Your Payment: Firstly, you may choose to adjust your payment amount to ensure that you still have some going towards your principal balance.
     
  2. Review Your Amortization Schedule: Consider adjusting your amortization schedule from a 20-year term to a 25-year term, especially if you have built up equity in your home. However, if you have already reached the maximum amortization period with your lender (such as a 30-year mortgage), increasing your payment may be necessary. Get in touch with your lender to discuss these adjustments and the possibility of a program that allows for re-amortizing your mortgage over a 40-year period. If you made a down payment of less than 20% when you purchased your home, the insurer may have the ability to assist in adjusting your amortization period. They hold influence with your lender and can help facilitate the necessary changes.
     
  3. 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.
     
  4. 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, as your dedicated mortgage professional I am here for you to help answer any questions you may have. 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.


Subscribe to receive monthly Home, Lifestyle & Economic News here.