Could the Bank of Canada (BoC) pull the trigger rate on your mortgage?
The risk of trigger rate mortgage defaults goes way down when interest rates drop. But BoC increases to mortgage interest rates lenders charge can push your variable rate mortgage into trigger rate territory.
That’s why you need to keep your eye on the trigger rate, and your hand on your wallet.
Trigger Rate = Mortgage Borrower Beware
Variable rate mortgages (VRM) are pretty tempting when interest rates are low. Shaving a few points off your interest costs and renewing regularly makes the most of your money.
When interest rates go up though, your monthly payment may not be enough to cover both the principal and interest on your mortgage.
Let’s say your payments look something like this at the start of your five-year, closed term variable rate mortgage:
Home purchase price = $500,000
20% down payment = $100,000
Mortgage amount = $400,000
Interest rate = 2.33%
Your payment in month one is $1,758.24. Your lender puts $995.83 towards principal and $762.41 to interest.
Because you have a closed-term mortgage, regardless of what interest rates do, your payments stay the same. The amount your lender applies to your principal merely goes down when interest rates go up.
If rates fluctuate mildly, it will take you longer to pay off the mortgage principal. If they skyrocket, your payment could be completely overtaken by interest costs.
And that’s the trigger point.
I Hit My Trigger Rate
Now let’s look at your dilemma if interest rates soar to 5.39% by month 12.
Your lender now needs $2,416 a month to cover your mortgage costs: $655 for principal and $1,761 for interest. The interest alone is more than your first mortgage payment.
Whatever you do, don’t panic.
Think of hitting your trigger rate as decision time for your mortgage. You could:
- lock in a fixed-term mortgage, or
- increase your monthly payment.
Find the current mortgage rate in Ontario.
How to Calculate Trigger Rates
Adjustable rate mortgages and fixed rate term holders don’t have to worry about a trigger rate. You’re only in potential financial peril if your mortgage has a variable rate.
You can calculate your trigger rate three ways:
- You can ask your lender. (If finances are tight, you may not want to.)
- You can use an online mortgage calculator.
- You can use this formula: payment amount x no. of payments per year divided by the mortgage balance x 100.
Your calculation looks like this: <$1,758 x 12 / $400,000 x 100 = 5%>
If interest rates stay below 5%, you may be hovering around the trigger rate, but out of the danger zone. When interest rates go over 5%, you’ve reached the trigger point. That’s when action is needed.
What’s going on with interest rates in Ontario in 2023. Read RBC’s prediction.
What To Do When Mortgage Payments Go Up
You do have other options if your mortgage payments exceed what you can afford.
Mortgage deferrals temporarily set aside your payments for up to six months. Family mortgages increase the income available to pay your mortgage by adding a family member to title to property. Ask a private lender for a second mortgage (talk to Axess Law if you need a second mortgage settlement lawyer). If you’re seriously in over your head, here’s how your lender’s power of sale works.
Portable mortgage pros and cons when changing lenders.
Why You Need a Real Estate Lawyer
Axess Law’s licensed real estate lawyers professionals go over your agreement of purchase and sale, and mortgage financing documents, to ensure you understand the terms and conditions. We make sure your mortgage contract is legally valid before you sign. Common problems home buyers encounter.
Mortgage interest rates can change between preapproval and finalizing a real estate transaction. Axess Law prepares mortgage documents when you switch lenders to get bridge financing to tide you over until your existing home sells. Here’s when to refinance your home.
When you’re ready to close your real estate transaction, your Axess Law real estate lawyer searches title to the property to ensure you get clear title. We look for rights of way and construction liens that may affect how quickly a home purchase or sale concludes. Average closing costs in Ontario.
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