When interest rates were low during the Canadian housing market boom of 2021, variable-rate mortgages were popular with those looking to buy a home.
But to cool an overheated housing market and tame inflation, the Bank of Canada (BoC) rapidly raised the overnight lending rate over a period of eight months. And higher borrowing rates spell trouble for variable-rate mortgage-holders.
While the BoC has paused rate hikes for now, interest rates continue to be high with the current variable rate at 6.7%. That has thrown a major wrench into most homeowners’ financial plans. A report by the National Bank of Canada estimates that around three quarters of Canadians with fixed payments on variable-rate mortgages have reached their trigger rate.
But what does that mean — and what does that mean for you, if you’re a home buyer whose monthly payments are becoming untenable?
Trigger rate versus trigger point
As interest rates remain high, Canadians with fixed payments on their variable-rate mortgages may have reached the trigger rate, meaning all of their monthly mortgage payments are now going towards interest.
“A trigger rate is the rate where the payment no longer covers the interest costs,” explains Elan Weintraub, a mortgage broker and co-founder of Mortgage Outlet.
Once you hit your trigger rate your lender will likely give you a call to increase your monthly payments.
The period after you hit your trigger rate is called the trigger point. “The trigger point means that your payment must change,” he adds.
According to Weintraub, the wave of homeowners hitting their trigger rates has already crested. “Pretty much everyone who was going to reach their triggering point has reached it,” he says.
However, that can lead to a much bigger problem down the road, when it’s time to renew.
“When homeowners come up for renewal – people with 40, 50- or 60-year amortization periods – in a year or two, either their payment is going to increase substantially,” he says, “or they’re going to make a lump sum payment to pay down the principal.”
Calculating your trigger rate
Every lender has a different formula to calculate the trigger rate, taking your payment schedule and outstanding mortgage balance into consideration. Your mortgage contract should have your trigger rate listed, but you can also calculate it using the following formula:
(Total payment amount x Number of payments per year / Balance owed) x 100 = Trigger rate %
For example, if you have an outstanding mortgage balance of $500,000 with monthly payments of $2,000. Here's how the calculation would look:
($2,000 x 12 / $500,000) x 100 = 4.8%
Your trigger rate would be 4.8%
What to do if you reach your trigger rate
Most lenders will notify you once you reach your trigger rate. If you have reached your trigger rate, Weintraub advises against panicking.
“Don’t panic and lock in [at a high rate] with your current lender,” he says. “You have to do the math.”
One way to make sure you are getting a lower rate is to compare mortgage rates across multiple lenders.
He offers some tips to avoid reaching the trigger rate:
- Increase your payment frequency: If you can increase your mortgage payments to bi-weekly or weekly, that can help put more money toward your principal.
- Increase your payments: Similarly, increasing your payment amount will help lower your outstanding amount. You can use the RATESDOTCA mortgage payment calculator to determine your outstanding amount.
- Put away additional money towards mortgage payments: If you get a bonus or a tax refund, consider putting this extra cash into your mortgage.
- Switch to a fixed-rate mortgage before you hit your trigger rate: Keep your eyes on the market and consider switching to a fixed-rate mortgage if you are worried about the high interest rate market. One thing you should be aware of, however, is that you may incur a penalty if you break your current mortgage.
Lastly, remember that each borrower’s situation is different. Weintraub advises that the best way to make sure you are not reaching your trigger rate – and spending more on interest, rather than paying down your principal – is to speak with a mortgage professional.
Compare Mortgage Rates
Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.
Here at RATESDOTCA, we compare rates from the best Canadian mortgage brokers, major banks and dozens of smaller competitors.