With today’s Bank of Canada Announcement being a 0.75% increase, we wanted to share an important discussion with you on what a trigger rate is.
For some borrowers, those in a variable rate mortgage with a static payment this next rate increase has the potential to hit their trigger rate.
Ross Taylor’s article from August 8, 2022, “Variable-rate mortgages are about to trigger payment increases” addresses trigger rate and trigger point in a clear and understandable representation.
Trigger Rates can be described as the following:
– 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 is increased enough to cover the outstanding interest.
At renewal, the remaining original amortization period will be used to calculate the payment amount offered.
– The Trigger rate is the rate that any increase to prime would push the net rate, resulting in the full payment being interest only. Any further increase in prime after that point would result in additional interest being capitalized into the mortgage, which would increase the outstanding balance. Borrowers can offset this by making a lump sum payment or increasing the payment, which would reduce the amortization.
If client makes a lump sum payment, increases their payments, changes frequency/changes payment due date, at any time throughout their term, this will result in a new trigger rate. If any of these items are processed, the TD Branch can provide details of a new trigger rate.
What is a Trigger Point?
For a Conventional Variable Interest Rate Mortgage (VIRM), the Trigger Point is when the principal amount plus interest owing exceeds 80% of the market value of the property.
For an Insured VIRM, the Trigger Point is when the principal amount plus interest owing exceeds 105% of the original principal amount of the mortgage loan.
What happens once a customer reaches the Trigger Point?
The client will be notified to inform them of how much the principal amount exceeds the Trigger Point (the excess amount). Once notified, the customer will have 30 days to: make a lumpsum payment; increase the amount of the principal and interest payment; or convert to a fixed rate term.
Let’s look at the positives!
Like the stock market, and all things in life, there will be ups and there will be downs. Remember to stay positive and know that times of high inflation and interest rates will not last forever.
There is a great deal of negative communication, and there are forces at play that will impact our society and nation with undesirable outcomes. It does not need to impact you negatively – you are a homeowner in one of the best places in the world and it will continue to be a great investment.
If you have any questions on trigger rates, please contact our team for immediate assistance.