I learned a new banking term this week that perhaps many of you are already familiar with. In which case you can ignore this week’s Post!: it’s called a “Trigger Point”. (As an aside, I enjoy the fact that I still learn new things about finance, not to mention being humbled in these markets). Of course, when I brought it up with a real-estate agent I know, they were all too aware of this.

 

So, a trigger point is related to a variable-rate mortgage. Despite the term “variable”, most variable rate mortgage have fixed monthly payments. What this means practically, is that let’s say you have a variable rate mortgage from a few years ago, when the prime rate was 2.45% for $585,000, which is the average mortgage in the GTA. This equals approximately $2000 per month in payments.

 

4 of the 6 major banks (including RBC) offer fixed payments for variable rate mortgages, as do many other lenders. As interest rates have risen, those on these types of variable mortgages are still paying the same $2000 per month. If your variable rate mortgage payments go up and down with changes to Prime, then you actually have an Adjustable Rate Mortgage for your repayment term.

 

Since March 1st of 2022, the Bank Prime Rate has increased four times from 2.45% to 4.70% due to market conditions. So here is the issue, as it relates to Trigger Point: If your bank’s Prime Rate ever rose to the point where your personal scheduled mortgage payments are only paying interest and not the principal, the bank would say you have exceeded your “Trigger Rate.”

 

When this happens, customers are notified, and they can choose between 3 ways to proceed:

 

1) Make a lump-sum payment against the loan amount.

2) Convert with a new loan at a fixed interest rate term.

3) Increase their monthly payment amount to pay off their outstanding principal balance within their remaining original amortization period.

 

I bring this up because there have recently been articles about the Banks notifying customers that they may be close to having to enact this Trigger Point.

 

If you have a variable rate loan and wish to get ahead of this issue, you could consider personally increasing your regular scheduled payments now. The change in repayment plan will be applied directly to the amount of principal owing. There are other repayment options you might explore as well.

 

Keep in mind, if your variable rate mortgage was arranged when the Prime rate was 2.45%, and if you took a thirty year amortization, then there is a very good chance you will hit your Trigger Rate this Fall.

 

If you are unsure where you stand, reach out to your bank or loan servicer and find out. And if you feel you are not being given good information, please get in touch with me, and I will do everything I can to help you assess your personal circumstances. You do have choices.

 

I’ve included a good article on this (LINK).

 

I believe that getting a good handle on the effects of inflation, and higher for longer interest rates is going to be a significant investment consideration going forward: for the first time in many years. That’s another reason why I’m excited to be working on my next seminar which is going to be about investing in the context of higher interest rates.

 

Canadians are particularly vulnerable to rising rates. The proportion of new home loans tied to variable rate mortgages rose to more than 50% throughout the second half of 2021, versus a decade long average of approximately 24%. Keep in mind, the overnight rate, which the Bank of Canada directly controls, is what banks use to set the prime rate, which in turn sets their variable rate mortgages. This is likely to be one of the biggest hurdles for the Bank of Canada as it begins to take monetary policy further into restrictive territory.

 

 

No predictions this weekend: I think my crystal ball has become fuzzy, as has the one trying to make sense of the volatility in this market!

 

Have a great weekend