What are trigger rates and how do they affect my mortgage?

Variable rate mortgage rates change as the Bank of Canada raises or lowers its policy rate (stock image)

If you have a variable rate mortgage, it’s important to understand how trigger rates work and how they affect your mortgage payments. Property owners should be aware that if the Bank of Canada raises or lowers interest rates, the amount of mortgage debt may change, even if the payments remain the same.

How are mortgage interest rates calculated?

the bank of canada Policy interest rate, the interest rate for lending money to banks and other institutions. Each bank then calculates a prime rate, which is the base rate for lending money.If the mortgage has a variable interest rate, the interest rate is Based on prime rate.

Therefore, variable rate mortgage rates change when the Bank of Canada raises or lowers its policy rate.

What is Trigger Rate?

With a fixed payment variable rate mortgage, your monthly payments go towards paying the mortgage principal and bank interest. As interest rates rise, the percentage of your monthly payments on your mortgage principal will decrease. The trigger rate is the interest rate that makes no payment on the principal of the mortgage and only pays the bank’s interest.If mortgage interest rates rise above the trigger rate, your monthly payments will be no longer sufficient to cover interest paymentsand you are no longer building capital.

At this point, your mortgage lender may contact you and advise you to adjust your payments.Monthly payments remain the same, although there is no contractual obligation to do so until a trigger point is reached can be financially dangerous.

Interest that cannot be paid in monthly payments is deferred interest. will be added to the total amount you oweInterest is then added to that total amount. This means that the outstanding amount keeps increasing every month even though you are making payments.If you do not adjust your monthly payments, your balance will be May rise until a trigger point is reached.

What is a trigger point?

The trigger is when the mortgage contract mandates a change in monthly payments. The exact trigger point for a variable rate mortgage is specified in the mortgage contract, Common trigger point For Canadian mortgages, this is the moment when your current outstanding balance is greater than the amount you originally borrowed.

Once the trigger point is reached, the lender will contact you to discuss options and set deadlines. obliged to act Start paying your balance. Lenders may offer options such as increasing the amount, paying a lump sum, or converting to a fixed rate mortgage.

what should you do

Check your mortgage contract if you don’t know your trigger rate and trigger point. You can also contact your mortgage lender and ask questions.

If you’re at or near your trigger rate, we recommend increasing your monthly payments. If you’re approaching a trigger point and you’re financially unable to increase your payments, you may be able to reach out to your mortgage lender to refinance in a more affordable way.

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