This month, we are touching base on trigger points and what you need to know, as well as providing you Fall home prep tips!
Understanding Mortgage Trigger Points
As we move into the Fall market, there are some important things you should be aware of.
While inflation has now likely peaked, we will still be dealing with the repercussions from these heightened levels for a while before things balance out. As inflation is corrected, we are also seeing some regions home prices move back to normal post-pandemic era.
If you have a variable rate mortgage (VIRM), often referred to as a static payment mortgage, your interest rate does increase, but your payment will not change, until you potentially reach your Trigger Rate.
What is a Trigger Rate?
• As interest rates on variable products increase and the payments don't change, there will be a point where the principal and interest payments can no longer cover the interest charged on the Mortgage or Term Portion. This happens when your rate has exceeded the Trigger Rate.
What is a Trigger Point?
• When interest rates increase to the point that regular principal and interest payments no longer cover the interest charged, interest is deferred, and the principal balance (total cost) can increase until it hits the trigger point.
What happens once a Client reaches the Trigger Point?
• The lender will notify the customer (via phone or letter) and give them the opportunity to: make a lumpsum payment; increase the amount of the principal and interest payment; or convert to a fixed rate term. We HIGHLY recommend you speak to us before doing so.
What can you do to prepare for this?
• Variable Rate Mortgage holders (VIRM), You should consider contacting your lender proactively and increase your payment regardless to keep up with the Principal paydown and avoid the trigger point.
You can estimate your own trigger rate with the following formula: (Payment amount X number of payments per year / balance owing) X 100) to get your trigger rate in percentage.
If you have reached your trigger rate, don't panic. You will be contacted by the lender and given options such as the following:
- Adjust Your Monthly Payment: Firstly, you may choose to adjust your payment amount to ensure that you still have some going towards your principal balance.
- Lump-Sum Payment: You may be able to choose making a one time lump-sum payment.
- Review Your Amortization Schedule: Consider switching your amortization schedule from 20-year to 25-year which would be ideal if you already have equity in your home. However, if you're already at your maximum amortization for your lender (i.e. 30-year mortgage), you would need to increase your payment. This is something we can work with you on to see if it is an option.
- Switch to a Fixed-Rate Mortgage: Some borrowers are now choosing to opt for a fixed-rate mortgage to avoid the issue of increased interest and trigger rates. Locking into a fixed rate can typically be done without penalty, but this may not be the best strategy.
Keep in mind, you may face penalties or future repercussions if you make changes to your mortgage mid-term. Be sure to discuss any mortgage changes with us before going ahead.
Fall Home Prep!
With Fall just around the corner, here are some of our favourite (and helpful!) home prep tips to help you be ready for the upcoming season.
- Inspect Your Gutters
- Check for Drafts
- Have Your Furnace Inspected
- Fix Any Concrete/Asphalt Cracks
- Turn Off Outdoor Plumbing
- Change Your Smoke Detector Batteries
While we understand that words like "inflation" and "trigger rates" can be intimidating, as your dedicated mortgage experts we are here for you. Please don't hesitate to reach out if you want to discuss the impact on your mortgage, or how to make changes.
Cheers,
Danny
