In a rising rate environment like we’re currently experiencing, chances are you’ve heard the word “trigger” a lot lately, especially if you’re in a variable-rate mortgage. 

A mortgage is made up of two components: 1) Interest; and 2) Principal. Each payment you make contributes some money towards each component. When rates increase, more of your payment goes towards interest. And, as rates fall, more of your payment will attack the principal balance.

Trigger rate vs trigger point

A ‘trigger rate’ is the time at which you’re no longer paying down your principal mortgage balance because more of the payment is going towards interest. A ‘trigger point’ is the time when your lender will require you to pay more towards your mortgage so that the outstanding balance doesn’t continue to grow. Trigger points vary by lender, so it’s best to check your mortgage contract for specific details.

With a fixed-rate mortgage, nothing will change until it’s renewal time. But with a variable-rate mortgage, bank prime rate hikes (which are prompted by Bank of Canada benchmark rate increases) are felt immediately. Although your actual payment amount may not change, the percentage paid towards the principal balance will decrease as interest rates increase. In other words, you won’t be paying your mortgage down as quickly… and possibly at all if you reach the trigger point. 

In any case, if you’re in a variable-rate mortgage, it’s wise to be proactive and speak with your mortgage agent or lender about increasing payments so that you continue to pay your mortgage down and aren’t faced with a large payment increase down the road when you reach the trigger point.

You can also often increase your fixed-rate payments up to a certain amount in order to help avoid shock at renewal.

Have questions about trigger rates or your mortgage in general? Answers are a call or email away!