TRIGGER RATE + TRIGGER POINT EXPLAINED
Are you in a variable rate mortgage and have heard the terms “Trigger Rates” & “Trigger Points”, in which you just don’t fully understand what they mean and if they affect you?
With the Bank of Canada increasing interest rates as they have, many of us borrowers have hit, or are near hitting our trigger rate. This essentially means that the monthly payment is no longer paying down principal and is interest only.
When this occurs, your mortgage is taking on additional interest each month in addition to your interest only payment, causing your mortgage balance to go backwards as you cut into your equity. For this reason, lenders offer a variation of options as we will discuss below.
- Who Is Affected By Trigger Rates & Trigger Points?
- Why Are Rates Changing?
- Why Is A 2% Inflationary Target So Important?
- What Is A Trigger Rate?
- What Is A Trigger Point?
- How Do I Calculate My Trigger Rate?
- What Are My Options?
- Those borrowers who are in a static variable rate mortgage.
- If you are in a variable rate mortgage and your payment has remained unchanged month over month, you are in a static variable rate product.
- If your monthly payments have changed, you are in an adjustable-rate mortgage and can disregard the trigger rate & trigger point.
- There are various reasons as to why rates are changing but the number one reason is no secret, Inflation.
- Let’s look at a simple example
- A $1 cup of coffee in a 2% inflationary period, takes 36 years to double via compound interest
- A $1 cup of coffee in a 4% inflationary period, takes 18 years to double via compound interest
- A $1 cup of coffee in an 8% inflationary period, takes 9 years to double via compound interest
- Because Inflation compounds year over year;
- At a 2% rate of inflation, we consumers can handle that slow increase over time
- At a higher than 2% rate of inflation, we consumers will see the cost of every day essentials spiral beyond our control
- The longer inflation remains high, the harder it is to correct and the greater risk to the economy over time.
- Where the real concern is the thought of inflation getting out of control, the unfortunate bi product are the increase in interest rates.
- Higher costs are especially challenging on households with FIXED incomes & is why combating inflation is so important
- As interest rates on variable products increase and the payments don't change, there will be a point where the principal and interest payments can no longer cover the interest charged on the Mortgage or Term Portion. This happens when your rate has exceeded the Trigger Rate.
- If the variable rate increases beyond the Trigger Rate, the product will have an increasing balance unless the regular payment (or lump sum payments) are increased enough to cover the outstanding interest.
Each lender with have their own variation, however, here is a general summary:
- For a Conventional Variable Rate mortgage (VRM), the Trigger Point is when the principal amount plus interest owing exceeds 80% of the fair market value of the property as determined by TD.
- For an Insured VRM, the Trigger Point is when the principal amount plus interest owing exceeds 105% of the original principal amount of the mortgage loan.
- For mortgage products with HELOC components (term portions), if at any time the outstanding principal amount (including any deferred interest) exceeds the original principal amount, then the Term Portion has reached the Trigger Point.
You will hit your trigger rate first. Once you hit your trigger point, you will see a payment reset. Therefore, we recommend being proactive once you hit your trigger rate.
- Easiest way to find your trigger rate is to download our app to access all state-of-the-art mortgage calculators – https://bit.ly/3swSgcI
- Use the “Simple Mortgage Calculator” to plug in your rate, mortgage balance & amortization to find out your trigger rate.
- Increase your payment
- Simply put, you will be able to increase your monthly payment by as little as 10%, up to 100%. You can do this on your online mortgage app or over the phone with your lender
- Lock in
- With a variable rate mortgage, you will have the ability to lock in your mortgage. It’s important to remember that you will only need to lock into a fixed term that matches your current remaining term.
- Restructure into a short-term fixed product (1-3 years)
- This option will give you the peace of mind, a steady payment, and the ability to capitalize on the market if rates begin to decline within your renewal date.
- Schedule lump sum payments
- Decide on a lump sum payment you are most comfortable making monthly.
- Contact your lender and schedule that monthly lump sum payment for a specified period.
- The benefits here is that you keep the flexibility within your base payment. Your payment remains at the minimum which otherwise is helpful for future qualifications on potential investment properties or a second home.
- OR make a single lump sum and revisit things at a later date
- Consider the HELOC option
- A big benefit to the home equity line of credit is that it only requires interest payments, ultimately creating more cash flow monthly. This option would be for those who are more concerned with monthly cash flow & less concerned with paying down their principal.
- Transfer your adjustable-rate mortgage (ARM) to a static payment variable (VRM)
- While acquiring the static payment component, there is a trigger rate to ensure principal is being paid.
A simple refinance may benefit you for a few reasons:
- Extending your amortization out will reduce your monthly payment
- Consolidating debt can reduce your overall monthly bills
- You can access your equity for aid in payment cushion
- We can search for more favorable lenders with lower rates
- You can add a home equity line of credit
- Ride The Wave & Weather the Storm
- It’s always important to stick to your investment strategies and remember your why. What goes up has historically always come down so weathering today’s storm may pay dividends in your future.
Regardless of any decision, its vital you take a deeper look at your monthly budget & personal situation. Click here as we’ve provided our Monthly Budget Calculator to better help you understand what’s coming in and what’s going out.- https://www.boychukmortgages.ca/