I have worked in the world of finance for over 20 years now, and I can count on one hand, the amount of times I have heard the term "trigger rate". I heard it today though, and thought I would share with you:
the Trigger rate on a variable rate mortgage occurs when your interest rate increases to a point that the entirety of your payment is eaten up by interest. With no principal being reduced, the lender is "triggered" to adjust the payment amount up, so the borrower does not end up underwater on interest payments
If you would like to understand this point further, click this link to a helpful Globe article for more detail.
In Canada, approximately 1/3 of all mortgages are in a variable rate contract. Given the recent pace of interest rate increases, the market is now at the point where 50% of all variable rate mortgages are at their trigger rate.
An additional 50 basis point interest rate increase (by the bank of Canada) will lead to approximately 65% of variable rate mortgages being at the trigger rate. That is what is expected at the next meeting, so one might expect some turbulence in the market.
So what are the options when one hits the trigger rate?
- make a lump sum payment to reduce the balance
- increase your payment amount (at whatever interval you are)
- extend the amortization of the mortgage --- the most likely outcome given banks will want to keep the business
- refinance your mortgage with another institution
Are variable rates going to cause problems in the market? We may find out soon enough.