What is the Trigger Rate and Why Does it Matter?
In this article, we’ll look at what the trigger rate is and how you might reach it.
ARM vs. VRM
It’s no secret that interest rates are rising. The Bank of Canada has done a super-sized rate increase the last couple of times, increasing interest rates by half a point each time. Many people in variable-rate mortgages ask, what’s the trigger rate and does it affect me?
Before we discuss the trigger rate, it’s important to distinguish between the two types of variable-rate mortgages. There’s ARM and VRM. Both are very similar. Your mortgage rate is based on a discount or premium on your lender’s prime rate. However, there’s a key difference to be aware of.
ARM stands for an adjustable-rate mortgage. It’s the most common type of variable-rate mortgage. As the lender’s prime rate changes, so does your regular mortgage payment. Your mortgage payment will increase or decrease as the prime rate goes up. If you saw your payment go up for the last couple of rate increases, this is the type of mortgage you have.
VRM stands for variable rate mortgage. Unlike ARM, your regular payment does not change when the prime rate changes. However, a change happens behind the scenes—the interest portion of the payment changes.
For example, if you have a mortgage payment of $2,000 and $1,100 goes towards the principal, and $900 goes towards interest, if rates went up, your payment would still stay $2,000 with a VRM. However, only $1,000 might now go towards the principal and $1,000 towards interest. Make sense?
When Do I Reach My Trigger Point?
The trigger rate is the rate at which the regular mortgage payments no longer covers the accrued interest. Interest rates for the variable rate has increased so much that the entire payment is dedicated towards the interest and nothing towards the principal. If rates were to increase anymore, the payments no longer cover the interest.
In our example above it would be when the interest portion of the payment exceeds $2,000 a month. When this happens, you have to increase your payment, make a lump sum and/or switch to a fixed rate with a higher payment.
Each individual borrower’s trigger rate is different. Although a rule of thumb to keep in mind is that, generally speaking, you reach your trigger point when interest rates increase by at least 2% from when you first signed up for the mortgage with your lender.
How to use the app to calculate the trigger rate?
We put together a short video on how to use the app to calculate your trigger rates. Check it out here
The Bottom Line
Do you want to know when you’ll reach the trigger point on your mortgage? Reach out to one of our mortgage pros today, who would be happy to calculate it for you.