What is Trigger Rate and How to Calculate It?
As the world started to come out of the pandemic lockdowns and businesses started to flourish once again. This massive return of customers also ushered in record high inflation in Canada.
The central bank, Bank of Canada, has been steadily raising interest rates to battle this skyrocketing inflation. Although this is to bring down the crazy high inflation rates, this change can also affect your Variable Rate Mortgage.
The Bank of Canada interest rate has now risen to 3.25%, the highest rate we are seeing since 2008!
For those with Variable Rate Mortgage on your upcoming presale condo project, this 3.25% increase in interest rate could mean that you are spending thousands of dollars more on your mortgage.
Let us look into detail, what a mortgage trigger rate is, how to calculate it, and what this means for your mortgage.
What is a Trigger Rate?
As the interest rates increase from Canada’s central bank, this in-turn affects the mortgage rates of homeowners.
This increase can have a major impact on Variable Rate Mortgages (VRM), because the lender’s prime rate will often increase hand-in-hand with central bank’s rates.
As a result of this, Variable Rate Mortgage holders with a fixed payment will see the interest part of their payments increase.
Note: Nothing changes for Fixed-Rate Mortgage holders as they would have locked in their rates when they signed the mortgage.
A trigger rate is the interest rate level where your lender can adjust your payment amount, even though it’s normally fixed.
Variable rate mortgages have trigger rates to ensure that homeowners are always building equity with their payments, especially when interest rates rise.
How to Calculate your Trigger Rate?
Trigger rate is actually different for each individual homeowner based on their mortgage rates and terms. In fact, most banks have their own way of calculating the trigger rate for mortgages.
Generally speaking, your trigger rate is when your interest payments exceed your total payments.
For example:
Let’s say you buy a home for $625,000 and have a down payment of 20% ($125,000). Your mortgage would be $500,000.
You now have a fixed payment variable-rate mortgage in January at the rate of 1.5%. You selected a five-year term with a 25-year amortization schedule. Your total payment for the five-year term would be $119,915.14, with $34,275.05 going to interest. Your monthly payment is $1,998.59.
The most important numbers in these scenarios are the total amount from scenario one ($119,915.14) and the interest from scenario two ($123,032.28).
In this case, your monthly payments don’t even cover the interest you owe. In theory, your interest would be deferred. Even though you would be paying your mortgage, your balance would actually increase since the interest you’re not paying is being added to the balance.
That’s why there’s a trigger rate in place for variable-rate mortgages. It’s to ensure homeowners are always building equity.
For a more accurate number, you should contact your mortgage broker so they can tell you exactly what your trigger rate is so you can plan your upcoming payments accordingly.
At ipresalecondos, we work with reputed and experienced mortgage agents that not only get you the best possible mortgage rates, but also educate you so that you know exactly how to plan your mortgage for your next preconstruction condo.
Handy Trigger Rate Calculation:
A simple and handy way to calculate your trigger rate is by using this formula:
(Payment Amount x Number of Payments) ÷ Balance Owed * 100
Example:
If you have an outstanding mortgage balance of $500,000 with bi-weekly payments (26 payments per year) of $1,100. Your formula would look like this:
((1,100 * 26 (÷) 500,000) *100 = 5.72%
Do keep in mind that every lender calculates trigger rate differently, so contact your mortgage broker for a more accurate number.
How to Calculate your Trigger Rate?
When your trigger rate hits, your lender will contact you with some options to make sure you do not have negative equity with your payments.
Typically you’ll have the following options to choose from:
Option #1: Adjust Your Payments
The reason for this is that your payments will have to change so that at least some of it is going towards your principal.
For those who already have equity on their home, your lender may suggest that you switch to a 25 year amortization if you’re on 20 year amortization.
But if you are already at the maximum amortization allowed, the lender will have no choice but to increase your payments.
Option #2: Make a Prepayment
Since the trigger rate is dependent on the remaining balance of your mortgage, if you make a lump sum payment, your trigger rate goes higher.
You would also increase your payments so that more is going towards your principal.
Do check with your lender on specific rules on how many additional payments you are allowed to make.
Option #3: Switch to a Fixed-Rate Mortgage
Check with your lender, if you can switch to a fixed rate mortgage without any penalties.
This helps you by locking in your current rate. Although you spend more on your mortgage and your monthly payments might increase, it does give you peace of mind!
Final Thoughts
The Bank of Canada’s rising interest rates are out of our control, but there is something we can do about it and safeguard our own mortgage rates. Taking control of this situation at the correct time is very crucial.
The ipresalecondos team guides you through the whole presale condo buying process with expert mortgage brokers.
We guide you not only for the best units and best prices for upcoming projects but also help you get pre-approved for a mortgage.
When the trigger rates hit, our team will sit with you to figure out the best options for you so that your entire buying process remains stress free!
At ipresalecondos.com Our goal is to provide you with an enjoyable and seamless experience. To that end, we’re constantly working on improving accessibility to latest presale projects in the city of Surrey, Vancouver, Burnaby, Richmond, port coquitlam , New Westminster and the rest of the lower mainland.
If you want to learn more about what kind of market we are in currently and how to get the most out of it, get in touch with Ravi Bhindi, who has 18+ years of experience in real estate and pre-sale condos. Please call or text at 604-825-8881 or email at info@ipresalecondos.com
