What is a Trigger Rate?
- As interest rates on variable rate mortgage products increase, the payments do not change. There will be a point where the principal and interest payments can no longer cover the interest charged on the mortgage.
- This happens when your rate has exceeded the Trigger Rate, otherwise reflecting an INTEREST ONLY payment with additional interest owed if your variable rate increases BEYOND that Trigger Rate.
- Because there is no further principal being paid down, the amortization remains “forever”.
- To offset any payment shock, it’s recommended you increase your monthly payment to cover the outstanding interest given you surpass your Trigger Rate.
- At renewal, the remaining original amortization period, say 25 years after a 5 year term of an original 30 year amortization is used to calculate the new terms payment amount. This is when the ‘reset’ happens on the payment.