Variable rate, Trigger Rate and Trigger Point
With all the increases we have had this year (2022), it becomes important to understand the effects on variable rate mortgages. For those with fixed rate mortgages, the following does not apply to your mortgage. If you have a variable rate mortgage, your mortgage falls into one of two categories: payment that varies with rate changes or static payment. If your variable rate mortgage payment has changed this year, the following does not apply to you either. If you don't know what category your mortgage falls into, but you have worked with me and are with any bank other than TD, this reading does not apply to you either. If you've worked with a major bank like CIBC, BMO, RBC, National Bank and a few other banks and credit unions, you'll want to check because each bank has a version of a variable rate mortgage with static payments.
So, what is trigger rate? The trigger rate is the rate at which your payment will no longer be sufficient to cover your mortgage interest. This means that you will no longer pay your mortgage down and it may even start to increase. To find out your trigger rate, you have a few options. Option 1 find the document you signed with your lawyer/notary, the trigger rate is indicated there. Option 2 call TD at 1-800-937-5020 or your bank. You can also calculate it from my app on mortgage DLC app. If you don't have it, go to https://www.dlcapp.ca/app/simon-bilodeau. If that doesn't work for you, here's a formula you can use to estimate it:
Your current payment amount X number of payments per year / balance owing X 100.
Here's an example for someone paying $1,000/month on a bi-weekly payment, and still owe $500,000: ($1,000/per 2 weeks x 26 payments per year / $500,000 X 100 = 5.2%. This means that the trigger rate, for this mortgage, would be 5.2% If you use the original balance of your mortgage, it will be even better. Now if you have found or calculated your trigger rate, and you have exceeded it, do not panic, keep calm. The first thing to know is that the bank is not coming to repossess your house or anything at this point. There is another trigger that needs to happen before any changes are forced upon you. You will need to pass the trigger point.
The trigger point is when your mortgage has returned to its original balance. If you had less than 20% down, your mortgage can go up to 105% of the value of the mortgage at the time of purchase. So doing nothing at this time is an acceptable course of action. However, this is far from a good idea. What's going to happen is that if you do nothing and rates stay high for a while, you're going to increase your mortgage instead of lowering it. So, upon renewal, your payment will jump dramatically.
Here are 4 solutions that are better. Option 1) Increase your payment so that it covers at least the interest but preferably part of the principal (if that fits your budget). I can help you with the payment you need, to achieve this. Option 2) Keep your payment the same, but pay lump sums to keep your amortization on schedule. Again, I can help you with the amount you need to use. Option 3) Convert to a fixed rate mortgage. This will modify your payment, up or down depending on the rate available at the time of conversion but this will put your mortgage back on schedule. There is now an option 4) for insured mortgages (those who purchased with less than 20%) will be able to modify their mortgage with up to 40 years of amortization, certain conditions apply. This means that you will pay off your mortgage more slowly, but pay it off anyway. This solution will likely become available for the other borrower as well.
To know which option is best for you, just contact me. To do so, make an appointment at: https://calendly.com/refinancebc/30-min-mortgage-updates.