What Are Trigger Rates?

wood cube block with percentage symbol icon. Interest rate, financial, ranking and mortgage trigger rates

Lately, there’s been a lot of buzz about interest rates. Questions abound: How long will the Bank of Canada maintain its policy rate at 5%? Is a rate cut on the horizon this year? Could we see mortgage rates dip to 4% by year-end? These questions are on the minds of everyone involved in Canada’s housing market, from buyers and sellers to real estate agents.

For those with mortgages, understanding what trigger rates are and their impact is crucial.

What Exactly Are Trigger Rates?

In simple terms, trigger rates are the point at which the interest rate of a mortgage reaches a level that prompts lenders to adjust the borrower’s total payment amount. This scenario is most relevant to variable-rate mortgages with fixed payments schedules. However, it’s essential to note that trigger rates don’t affect those with fixed-rate mortgages or variable-rate mortgages with adjustable payments.

Diving Deeper into Trigger Rates

The concept of a trigger rate is designed to ensure homeowners can continue building equity. It varies based on several factors, including the current market interest rates, and differs from borrower to borrower.

A key point to understand is that trigger rates come into play when the interest charged on a mortgage becomes so high that the regular payments can no longer cover it, leading to a scenario where no equity is built. When trigger rates are hit, borrowers are at risk. Not only failing to pay down their mortgage but potentially increasing their loan amount due to deferred interest.

The Mechanics Behind Trigger Rates

The calculation of a trigger rate can vary but generally involves the loan amount, payment frequency, and interest rate. It’s based on the premise that no prepayments are made. Should a borrower make a prepayment, it’s applied to the principal, potentially increasing the trigger rate. Understanding your specific trigger rate is crucial for effective budgeting and financial planning.

When a trigger rate is reached, lenders will typically inform borrowers, presenting them with several options. These can range from adjusting payments to ensure some go towards the principal, making a prepayment to increase the trigger rate, switching to a fixed-rate mortgage, or even paying off the mortgage balance entirely to avoid trigger rate implications altogether.

Strategies to Avoid

To steer clear of these rates, borrowers are advised to keep their mortgage on track and consider increasing their payments if financially viable. Shopping around for no-closing-cost options and lenders who might waive such costs can also be beneficial. Building a strong financial profile, including a good credit score and a low debt-to-income ratio, can further aid in securing favorable mortgage terms.

In Conclusion

While trigger rates present a potential challenge for borrowers, being informed and prepared can help mitigate their impact. Keeping an eye on your mortgage details and considering your financial situation carefully can help you navigate the complexities of trigger rates effectively.

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