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A trigger rate can vary by individual mortgage terms.

What’s a mortgage trigger rate and how can you calculate yours?

Here's how to find out if you're almost at yours.

Over the past several Bank of Canada rate announcements, the Bank of Canada’s interest rate has risen by almost half a point to a full point each time. And if you’ve chosen a variable-rate mortgage, you’re probably quite familiar with this increase. 

You may have also been hearing the term “trigger rate” floating around. In fact, with a prediction of 750,000 Canadians who may be impacted by trigger rates this fall, it’s no surprise this has become quite a topic of conversation. 

But what exactly is a trigger rate and–if you have a variable mortgage–how will it affect you? To understand this mortgage term and the impact it potentially has on your mortgage, it’s first important to identify the two types of variable-rate mortgages available to you: the adjustable-rate mortgage (ARM) and the variable-rate mortgage (VRM).

Understanding ARM and VRM

Adjustable-rate mortgages (ARMs) are the more common type of variable-rate mortgage. Your monthly rate changes when the prime rate changes–whether up or down–so does your mortgage payment. On the other hand, if you have a VRM, your mortgage payments won’t change when the prime rate does–however, behind the scenes a portion of your payment gets reallocated to interest.

Hypothetically, if your monthly mortgage payment was $3,000 and $2,100 goes towards the principal (aka the equity), and $900 goes towards interest. If the prime rates go up, your payment would still stay at $3,000 with a VRM, but now $1,900 goes towards your principal, while $1,100 goes toward your interest. 

What’s a mortgage trigger rate and how can you calculate yours?

With an ARM, you’ll still be paying the same principal amount, whereas with a VRM, there may be a point where you’re paying more towards your interest than your principal–and in some instances, your monthly payments may only cover the interest rate and not the principal. But what happens if your interest payments increase, even beyond your monthly mortgage costs? 

That’s where your trigger rate comes in. 

What is a trigger rate? 

A trigger rate is the rate percentage where the payments for your mortgage can no longer even cover the interest.

How to calculate your trigger rate

A trigger rate can vary by individual mortgage terms, however a general rule of thumb is that your trigger rate is when your interest rate increases by at least 2% from when you first signed up for your mortgage. 

One way to calculate you trigger rate is: 

(Payment amount x the number of payments per year / balance owing) x 100 = Trigger rate in % 

An example of this calculation is: If your outstanding mortgage balance is $450,000 with bi-weekly payments of $1,200 (which means 26 payments per year), your formula would look like: 

($1,200 x 26 / 450,000) x 100 = 6.93%

In this example, your trigger rate would be 6.93%. This means that this is the percentage you would be paying more interest than your monthly mortgage payment. Now, it’s important to flag that each lender has a slightly different formula to calculate the trigger rate, so it’s important to contact your mortgage agent to discuss details. 

What happens when you hit your trigger rate? 

Once you hit your trigger rate, your mortgage lender will generally get in touch with various options, like: 

  • Changing your payment: You’ll probably need to increase your mortgage payments, so at least some of it is covering your principal. One way to do this is to lengthen your amortization period. But, if you’ve already capped your maximum amortization period, another option would be to increase your monthly payments. 
  • Offering a lump sum: Given that the trigger rate is impacted based on your remaining mortgage balance, paying a large amount towards your mortgage will help keep the trigger rate percentage at a higher number. However, it’s important to talk to your lender as some mortgages have restrictions on how much you can pay at once. 
  • Opting to lock in a fixed-rate mortgage: You may also have the option to lock in the current fixed-rate mortgage. In some situations you may be able to avoid penalties. While this will generally increase your monthly mortgage payments, you’ll have much more peace of mind knowing your mortgage won’t fluctuate with the ever-changing prime rate.

If you want further information about locking in to a fixed-rate mortgage or what your potential trigger rate could be, fill out our quick-and-easy application and we’ll connect you with one of our mortgage experts to answer any and all your questions today. 

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