What is a trigger rate?

There has been a lot of coverage in the news about trigger rates for variable mortgages over the past few months and with the Bank of Canada scheduled for another potential rate hike on January 25th (The market consensus is an increase of 0.25%) I thought I would share some information which might be useful.

What is a mortgage trigger rate?

A mortgage trigger rate is the point at which your monthly mortgage payments no longer cover the monthly interest owing on your loan. This is resulting from the Bank of Canada increasing the overnight lending rates that will effect anyone who holds a variable rate mortgage whose payments don’t adjust each month.

If you have an adjustable rate mortgage payment, your monthly mortgage payments fluctuate with interest rates meaning you will never hit a trigger point. Your monthly mortgage payments will increase automatically with rising rates to cover the increased interest.

How do I know if I have an adjustable or fixed monthly payment on my variable rate mortgage?

The best way is to refer to your mortgage documents. If you can't find your documents you can either contact your lender, bank or your mortgage broker for clarification.

How much could rising rates change my payments?

A 1% increase in interest rates will result in an extra $5000/year of interest payments on a $500,000 mortgage. In 2022 we saw the Bank of Canada increase its rate 7 times for a total of a 4% increase from 0.25% in March to 4.25% in December 2022.

A 4% increase could mean up to an additional $20,000/ year in interest for people who hold a variable mortgage (on a $500,000 mortgage).

The rates have gone up but my payments haven't changed on my variable mortgage, why?

With most variable mortgages your monthly payment remains the same even with rising interest rates unless you call your lender or bank to increase it. The lender or bank in most cases will just shift the percentage of your payment towards interest instead of principal increasing the length of your amortization. You will usually receive a letter that your rate has increase.

There are two main problems with the lender or bank shifting the percentage of the payment towards interest without increasing the monthly payment amount.

1. You aren't paying down the principal of the mortgage at the same rate (or at all) which means you are just treading water with your debt. Think about this the same way as only paying the interest on your monthly credit card bill. Not a great idea.
2. There could come a point when your monthly payment doesn't even cover the interest on the loan each month. This is your mortgage trigger rate.

If you have received rate hike notifications from your lender or bank, but your monthly payments haven't increased, you should reach out to your bank, lender or mortgage broker to get an update on your payment and amortization schedule.

What happens when I hit my mortgage trigger rate?

If you hit your mortgage trigger rate, your lender or bank will usually give you two options to choose from.

1. Pay off any extra interest owing on your account in a lump sum or instalment plan. In my opinion this is not the best option as rates could continue to rise.
2. Increase your monthly mortgage payments to cover the extra amount owing each month in interest. I like this option because it usually allows your to bring your amortization back down to a more normal range (25-30 years) while working within your monthly budget.

What can I do to have a better understanding of my mortgage in the future?

1. Keep track of what rates are doing and proactively reach out to your lender or bank to ensure that your monthly payments are keeping you on track to meet your financial goals. Especially while rates are on the rise.
2. When refinancing your next mortgage, make sure you are in a position to remain financially healthy if rates increase further. Discuss the options between fixed and variable rates with your financial advisor or mortgage professional.
3. Sign up for an account with Perch | Mortgages, simplified . A digital mortgage brokerage that gives you free monthly insights into your property value and mortgage. This way you always know the best time to switch or refinance your mortgage. It's free to sign up and you get access to your own Mortgage Advisor who can answer any questions you may have 7 days a week.

Want to learn more about trigger rates? Check out a more in-depth article written by one of my favourite content creators Sean B. .

This newsletter is not in any way intended to be financial advise. If you have questions or concerns about your current mortgage you should seek advice from a professional mortgage broker or financial advisor.

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