What the heck is a Trigger Point on a Variable Rate Mortgage?
As rates have been rising lately, those of you that are in Adjustable rate mortgages have seen your payments increase to ensure you still pay your mortgage off in the required timeline. Now what if your payment hasn’t changed but you know you are in a floating rate mortgage? Most likely you are in a Variable Rate Mortgage as opposed to an Adjustable Rate Mortgage. What does this actually mean and how does it affect you in a rising rate environment?
If you are in a variable rate mortgage (not an adjustable rate mortgage), when prime lending rate changes your payment will not change-just the amount going to principal will change.
When your rate goes down, more goes towards principal. When rates rise, less goes towards principal.
If your rate goes up, and your payment is no longer sufficient to cover the interest, the interest ‘overage’ is added to your mortgage balance, or deferred.
When rates are rising, the payment amount will stay the same until it reaches the Trigger Point. The Trigger Point is when your mortgage balance, including any deferred interest, exceeds the original amount that you borrowed.
At this time you will be notified by your lender and will usually have 30 days to either make a lump sum payment, increase your payment amount or convert to a fixed rate term to keep your mortgage amortization in line.
*Our suggestion is that you increase your payments so that this Tigger Point is not reached as the amount you would need to increase your payments could greatly affect your budget. You can reach out to your current mortgage lender and find out when this Trigger Point will kick in on your mortgage and adjust your payments as needed.
Please reach out to us if you have any questions around this.