June 19, 2023
Understanding the Trigger Rate in Variable Mortgages: An Essential Guide
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Looking to learn a little more about mortgages? Today, we are delving into an integral aspect of variable rate mortgages that is often overlooked but incredibly important: the trigger rate. We will break down what it is, why it matters, and how it can impact your mortgage payment strategy.
Let’s define what we mean by the “trigger rate”. In the simplest terms, the trigger rate is the interest rate at which all your mortgage payment goes towards the interest of your loan. This scenario means you aren’t reducing your principal balance; your primary debt remains unchanged.
Why does this matter? When your payment is solely servicing the interest and not reducing the principal, your mortgage, in essence, becomes a never-ending cycle. It forces you into one of three options: increasing your payments to bring down the principal, adding unpaid interest to your principal, or switching to a fixed rate mortgage.
You should note that hitting the trigger rate is only possible with variable rate mortgages that have a fixed regular payment. This situation occurs when prime rates increase significantly. For fixed-rate mortgages or variable mortgages with variable payments, your payment adjusts with interest rate changes, and so you wouldn’t experience this.
The point at which you hit your trigger rate becomes your “trigger point”. At this stage, you owe more money on your mortgage than your original principal balance. It’s akin to walking up a descending escalator: no matter how much you move, you find yourself in the same spot.
Understanding the concept of the trigger rate is crucial for a few reasons:
Risk Management: As a homeowner, understanding your trigger rate can help you mitigate the risks associated with fluctuating interest rates. By monitoring market trends, you can strategize and make an informed decision about whether you need to adjust your mortgage payments or consider switching to a fixed-rate mortgage.
Financial Planning: Knowing your trigger rate can aid in long-term financial planning. If you’re aware that a significant increase in prime rates could push your mortgage into the trigger rate territory, you might opt to set aside extra funds or seek other financial solutions.
Homeownership Sustainability: Ultimately, the trigger rate impacts the sustainability of your homeownership. If you find yourself continuously servicing interest without touching the principal, you’re not making real progress towards owning your home outright.
Now, let’s be clear: reaching the trigger rate isn’t the end of the world. It’s a signal that you need to re-evaluate your current mortgage strategy. The key is to stay informed, monitor market trends, and adapt your plans accordingly.
At EverythingMortgages.ca, we are here to support you on your mortgage journey, offering insight, expertise, and solutions to help you navigate these complexities. Feel free to reach out for a consultation, and let’s tackle these mortgage challenges together.
At Everything Mortgages we are a team of licensed experts who are ready to help find the mortgage solution that’s right for you. What drives our motivation to succeed is not the loan we secure but the difference we make. Whether it’s helping the first-time home buyer purchase their first home, the small business owner looking for a better solution or the hardworking professional break free from high-interest debt, we work hard to help you become mortgage-free sooner and build wealth creation faster.
Note: This article is intended for informational purposes only and does not constitute financial advice. Please consult a financial advisor or mortgage professional before making decisions about your mortgage.
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