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What is a mortgage trigger rate?

November 2022 – 15 min read

Key takeaways

  • The mortgage trigger rate is based on current market interest rates.

  • No 2 homeowners will have the same mortgage trigger rate.

  • Your mortgage lender will contact you when you have hit the trigger rate to explain different options.

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An Introduction to the mortgage trigger rate

A mortgage trigger rate is a term used in the mortgage industry that refers to the interest rate at which an adjustable-rate mortgage (ARM) will reset. This rate is typically based on the current market interest ratesOpens a new website in a new window and will cause the monthly mortgage payment to adjust accordingly.
 
It's important to be aware of your trigger rate, especially if you have an ARM, as it can affect your overall budgeting and long-term finances. If you're considering a new mortgage, be sure to ask your lender about the trigger rate, how it could impact you, and how you can avoid hitting it.  

Adjustable-rate mortgage vs. variable-rate mortgage

An adjustable-rate mortgage, also known as an ARM, is a type of mortgage that has an interest rate that can change over time. The initial interest rate on an ARM is usually lower than the interest rate on a fixed-rate mortgage, but it can increase after a certain period.

The periodic adjustment periods are typically 1 year, but they can be longer or shorter. As the lender’s prime rate changes, so do your regular mortgage payments. Your mortgage payment will increase or decrease as the prime rate goes up or down.

A variable-rate mortgage is another type of mortgage that has an interest rate that can change over time. However, the interest rate on a variable-rate mortgage is based on market conditions and can fluctuate up or down, whereas the interest rate on an ARM is predetermined by the lender.

With a variable-rate mortgage, your regular monthly payment does not change when the prime rate changes. However, behind the scenes, there is one change that occurs, and that is the interest portion of the payment. 

  • An example of this would be if you had a mortgage payment of $2,000 and $1,100 goes towards the principal with the remaining $900 going towards the interest, if the interest rates went up, your payment would stay the same at $2,000 with a variable-rate mortgage. In this scenario, more money would now go to the interest.

How is the mortgage trigger rate calculated?

No 2 homeowners will have the same mortgage trigger rate. This is because the trigger rate is based on the amount of your mortgage, the current interest rate, and your monthly payment structure.

You can quickly review your initial mortgage trigger rate by looking over your mortgage contract to see what it is, as your rate should be clearly visible there. The trigger rate listed there also assumes that you have not made any prepayments to your mortgage.

When you do make prepayments to your mortgage, more of that money will go towards the principal portion, therefore your trigger rate would increase. It should also be known that different mortgage lenders will have slightly different ways to calculate your trigger rate. 

What happens when you hit the mortgage trigger rate?

Typically, when you hit your mortgage trigger rate, your lender will contact you to inform you about some different options that you may have. The goal is to make sure that you avoid a situation where your payments fail to cover more than the interest. You could have some of the following choices available:   

Adjust your payment: You can change your payment structure to make sure at least some of your payment is going towards the principal portion of the loan. An example of this would be if you currently have a 20-year amortization period, you could extend that period to a 25-year amortization.   

Make a prepayment: The trigger rate of your mortgage is dependent on the remaining balance of the loan. Making a lump-sum payment can push your trigger rate higher. You could also increase the number of payments you make per month so that more money is going towards the principal. You would most likely have to adhere to your mortgage rules about how many extra payments you can make.  

Switch to a fixed-rate mortgage: Sometimes, your lender may suggest or recommend that you switch over to a fixed-rate mortgage without penalties. When you do this, you can lock in at current market rates. However, while this strategy could give you relief in the short-term, in the long-term, it could end up costing you more and your payments could increase.  

How can you avoid the mortgage trigger rate?

The best way to avoid your mortgage trigger rate is to be proactive about your payments and make sure you are aware of how much interest you are paying.

If you can, try to make larger payments or prepayments when possible so that you can pay off your mortgage faster. This will help to lower the remaining balance of your loan, and therefore, increase the percentage of each payment that goes toward the principal.   

Another good strategy is to keep tabs on market rates and renegotiate your rate and term with your lender before your mortgage trigger rate hits. This could help you lock in at a lower interest rate and save money in the long run. However, it’s important to note that there may be some penalties associated with breaking your current mortgage contract.

What’s next?

  • Be proactive with your mortgage payments to know how much interest you are paying.

  • If you have hit your mortgage trigger rate, be sure to choose another strategy recommended by your lender.

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.