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What happen when my mortgage hits trigger rate?

Steven Ho Buyer

What is Mortgage trigger rate?

A trigger rate is when your interest portion exceeds your mortgage payment.

It only applies to variable-rate mortgage holders that are on a fixed payment schedule.

Calculate your trigger rate is to use the following formula:

(Payment amount X # of Payments per year / Balance owing) X 100 = Trigger rate in per cent.

If you have an outstanding mortgage balance of $500,000 with bi-weekly payments (26 payments per year) of $1,000. Your formula would look like this: ($1,000 X 26 / $500,000) X 100 = 5.2%

What happens when you hit your trigger rate?

Bank of Canada increased the interest rate by 75 basis points on Sept. 7, it is now at 3.25%. Therefore, the cost of borrowing for variable-rate mortgage holders rises in tandem.

Since March 2022, homebuyers and existing mortgage holders have had to absorb 300 basis points’ worth of rate hikes – the steepest pace since the mid-1990s.

With a variable-rate mortgage, the amount you pay is usually fixed. What changes is the amount of your payment going to interest?

Each individual borrower’s trigger rate is different. Once your rate goes above the trigger rate, your payments will no longer cover the interest.

At this point, you’ll have the following choices available:

  1. Increase your payments to cover all the interest.
  2. Make a lump sum payment to push your trigger rate higher
  3. Switch to a fixed-rate mortgage

At the time of this writing, most banks/economists believe we are approaching a plateau of interest rate, but acknowledge that we could see an additional 0.25% to 0.75% of total increases in late 2022 or early 2023 before we get to that point.

Here is a customer scenario (illustrative purposes only): 

Bob signed his Mortgage Loan Agreement for a $500,000 mortgage:

    • 5-year Variable Closed Mortgage at an interest rate TD Mortgage Prime Rate minus 0.70% (3.00% on the date of signing).
    • 25 years amortization
    • Bi-weekly payments (26 payments per year) of $1,000
    • Trigger Rate: 5.20%

Now after 5 increase hikes, Bob’s new Variable Rate is now at 6%. Bob has now exceeded the Trigger Rate and his payment can no longer cover the interest charged on the mortgage.

Bob would receive a letter advising him that he has reached his trigger rate and should consider:

      • adjust his payments high than $1,475.62*
      • make a lump sum payment of $160,000 * to keep his bi-weekly payment of $1,000.
      • or convert to a fixed rate mortgage.

* Use the Mortgage payment calculator to confirm how much Bob needs to increase his payment by in order to adhere to the amortization schedule.

If you’re concerned about your trigger rate, talk to your lender about your options!

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