Most variable rate mortgages have static monthly payments, which protect the borrower’s cash flow from changes to the Prime Rate. Four of the big six banks offer this, and so do several credit unions.
But further Bank of Canada rate increases this Fall has led these banks to increase many borrowers’ scheduled payments.
This happens when a mortgage’s Trigger Rate and Trigger Point come into play. Here you will find a complete explanation and discussion of trigger rate and trigger point.
The most recent Bank of Canada overnight rate announcement on October 26, 2022 resulted in another 0.5% increase to the Prime Rate, and it is quite possible your static payment variable rate mortgage might hit its own “Trigger Rate.”
If you exceed your personal Trigger Rate, to avoid your mortgage balance owing increasing, the bank will notify you. They typically recommend customers increase the mortgage payment or convert to a fixed rate mortgage to avoid reaching the Trigger Point (defined below). However, not every bank will require an action by the customer (and/or cosigner) at this time. Some will wait to see if your current mortgage balance is now the same as or even greater than the original mortgage balance. As you will see below, this is called your Trigger Point.
What is my Personal Trigger Rate?
Here is a simple calculator which will approximate your personal trigger rate. This is the first and only free such calculator in Canada. Please note this is not intended as a basis for financial decisions. It’s best you contact your financial institution to confirm your personal trigger rate. The calculation methodology was generously provided by Frances Hinojosa, Tribe Financial Group.
If you want to understand all your options, please contact us.
When interest rates increase to the point that regular principal and interest payment no longer covers the interest charged, interest is deferred, and the principal balance (total cost) can increase until it hits the Trigger Point.
Trigger Point is when the outstanding principal amount (including any deferred interest) exceeds the original principal amount.
It’s most likely to happen first to variable rate mortgages arranged between the Spring of 2020 and early March 2022 when the Prime Rate was only 2.45%. Today, at the end of October 2022, the Prime Rate is now 5.95%. A staggering increase of 3.5% in seven short months.
The longer your amortization period, the lower will be your mortgage’s Trigger Rate.