- A tale of two triggers
- What is the trigger rate?
- What happens when I reach my trigger rate?
- What is the trigger point?
- What happens when I reach my trigger point?
- What should I do if I’m concerned about reaching my trigger rate?
- What should I do if I’m concerned about reaching my trigger point?
#MortgageTriggerRate
The Bank of Canada has increased interest rates in an effort to regain control. As inflation continues to drive up prices, the Bank of Canada has increased interest rates in an effort to regain control. The prime rate of the majority of the banks have more than quadrupled this year. Now, this substantial increases raised public concern regarding the trigger rate for mortgage borrowers. So nothing will change for you if you have a fixed rate mortgage until it's time to renew. If you have a variable rate mortgage, these rate increases have an immediate & direct impact & you may be at risk at exceeding your trigger rate. Not all variable rate mortgage holders must be concerned about trigger rates. Your trigger rate is the interest rate at which your regular payment is insufficient to cover all of the interest that has accrued since your last payment. So in other words, your whole mortgage payment goes towards interest & none of it towards the principle. This is the first of two possible triggers. When you reach your trigger rate, what is triggered is a rise in your outstanding balance due to the fact that your regular payment is insufficient to meet the cost of borrowing, the entire payment is allocated towards interest and remaining balance is referred to as deferred interest & added to your debt to be paid at a later date. When you hit your mortgage's trigger rate, you stop making mortgage payments & begin to borrow more. This is referred to by experts as negative amortization. Although no action is required, when you reach your trigger rate, your lender or mortgage broker will likely call to inform you that your payments are no longer sufficient to pay off your mortgage. They will describe your alternatives and assist you in making an informed choice of how to proceed. Just because you can continue making the same monthly payment as before does not mean you should. With each passing month, you will owe more and more money on your mortgage. Your rising balance will need a rising interest payment, exasperating the problem over time. Whenever possible, increase your monthly mortgage payment well before you reach your trigger rate. Otherwise, you run the risk of reaching a level that is far worse, your trigger point. Your trigger point is the time at which you can no longer carry on with the same monthly mortgage payment that you've been making. The trigger point is not defined by a single overarching rule. Your mortgage provider will instead specify a specific trigger point. Your trigger point could also be expressed as a percentage of the value of your property. When you reach your trigger point, you will be required to begin paying off your balance. The lender will contact you to explain the choices and provide a timeframe for correcting the issue. Your choices may include at least one of the following. So in order to get back on track, the simplest solution, although not necessarily the easiest to do, is to increase your monthly payments. The standards vary by lender, by banks, but your minimum payment must at least cover your interest expense and provide enough for some principal reduction. You may be necessary to adjust your payment in order to return to the original amortization schedule. Utilize the mortgage payment calculated to assess potential costs. If you have cash laying around, you can make a lump sum payment towards reducing the balance of your mortgage. This is a one time payment. It will bring you below your trigger point but only temporarily if you do not increase your payments. Convert to a mortgage with a fixed rate. The majority of lenders permit consumers to move from variable to a fixed rate at any time. Fixed mortgage rates are often higher than variable rate mortgages but they are guaranteed to remain constant for up to five years. This modification will almost certainly increase your monthly payments but it will help you prevent additional surprises for the balance of your term. In addition to increasing your regular payments, you may be able to extend your amortization duration to maintain reasonable monthly payments. So remember that the longer you take to pay off your mortgage, the more interest you will ultimately pay to the bank, extending a hundred thousand dollars mortgage from five years to 10 years at four and a quarter percent incurs additional interest of approximately $11,000. Refinancing may incur penalties and the standard penalties for breaching a variable rate mortgage is three months of interest and will most likely require the assistance of a real estate lawyer.
