spotlight

SIMPLIFYING MORTGAGE TRIGGER RATES AND TRIGGER POINTS

What is a trigger rate, does it affect me, and should I care? If you have a variable rate mortgage or know someone with one, you’ll want to care.

What’s Happening? If you stay up to date with our emails and content (make sure you’re following us on IG too!), then you’ll be well aware of the interest rate changes that have been made by the Bank of Canada (BoC). At Green Mortgage, we want to make sure you feel confident and up to date with future changes too. Which is why we’re going to give you some guidance today on a few Real Estate terms you might be hearing more about soon, if you haven’t already.

The terms you’ll hear in the not–so–distant-future are trigger rates and trigger points, alongside variable and adjustable–rate mortgages.

What Should I Know? Variable Rate Mortgages (VRM)—If the prime changes, the rates change to reflect it. Interest rate changes don’t typically change your mortgage payment.

Adjustable–Rate Mortgage (ARM)—If the prime changes, the rates change to reflect it. The difference is that your mortgage payment will change as interest rates change.

Trigger Rate—If interest rates rise to the point that your agreed interest and principal rates won’t cover the added charge, interest is deferred, and the total cost of your mortgage (principal balance) can increase until it hits the trigger point.

Trigger Point—f the total cost of your mortgage (including deferred interest) exceeds the original agreed amount, then your lender will inform you and ask you to do one of three things.

1: Make a lump sum payment.

2: Increase the agreed principal and interest.

3: Convert to a fixed rate mortgage.

What Borrowers Are Affected? Around 15% of the variable rate mortgages in Canada (taken between March 2020–March 2022) are in a group that will likely hit their trigger rates this fall, and possibly see payment increases.

This is thanks to a mixture of two things. The recent interest rate increases by the BoC combined with the prime rate drops of March 2020. These drops have provided people with lower mortgage payments and lower trigger rates over the past couple of years. However, it’s also meant that this group has quickly reached their trigger rate now too.

What Should I Do Next? If you’re reading this and think you might be in this group, don’t panic. Instead, contact Green Mortgage for support. We can advise you on the best options to take, before your mortgage payment has the chance to increase.

If you have questions, we have answers. Green Mortgage’s main priority in uncertain times is to continue supporting you as you navigated your mortgage.

HOW DOES INFLATION AFFECT MORTGAGE RATES?

If the last couple of years hadn’t dealt us enough curve balls to manage—now we’ve got inflation to contend with too! From gas prices that leave us wincing at the pump, to our weekly grocery shop (heck, we can’t even enjoy a basic bottle of vino!), Everything is raising in price. For those of you who are also planning to get on the property ladder, know that inflation will affect your mortgage too. How your mortgage will be affected by inflation, and what you can do to lessen the blow!

What Is Inflation? Let’s get something clear: inflation isn’t inherently a bad thing. Some inflation is a sign of a healthy economy. It’s when inflation rises too steeply that things get out of hand. As everything raises in price to keep up, the value of the dollar drops. If it drops too far, we enter a recession. I’m sure over the years you’ve seen other countries face a situation where their currency has dramatically fluctuated and almost become completely worthless; with Argentina, Indonesia, and Turkey leading that race. How Does Inflation Affect Mortgage Rates? For real estate in Canada to stop anything like the above from happening, the Bank of Canada (BoC) has a mandate to keep inflation at 2% per year. This is achieved through targets that control the amount it costs for banks to borrow from each other over the course of just one night. By monitoring these overnight rates, banks can raise or lower interest rates to match and cover costs. In theory, higher interest rates stop people from borrowing money, slows their spending, and makes them more likely to save. The results should slow inflation.

How Are Variable and Fixed Rate Mortgages Affected?

Variable Rate As interest rates raise, variable rate mortgages are directly impacted because their rates shift up and down as their banks prime rate does. So, the higher the BoC raises their interest rates, the higher your mortgage rate would go immediately. If you currently have a variable rate mortgage, you might have already noticed a raise in your monthly payments.

Fixed Rate With a fixed rate mortgage, you’ve your rate locked in, and it won’t be affected when rates go up or down until your renewal period. If you’re planning on getting a fixed rate mortgage in the future or renewal is approaching, know that the interest is likely to raise up slowly in future months to match rising prime rates.

What Mortgage Type Is Right for Me? In terms of choosing a variable or fixed rate mortgage facing the current economy, fixed rate will always bring you more stability. Once you lock that rate in, that’s it, and you won’t need to worry about your payments going up for the next few years. However, the gap between fixed and variable mortgage rates is 1.5% right now, and it would take significant growth (0.75%+ for 5 years) for a variable not to be worthwhile. What Can I Do Now?

Renew Early

If you’re fixed rate, see if you can renew early without a penalty —it’s possible! You might end up with a higher monthly price overall, but it’ll reduce the chances of you being even more shocked later as rates raise.

Fixed vs Variable Leading on from the above, if you’re fixed rate it may even be better for you to swap to variable at renewal. I know you like knowing what your payment will be each month, but variable rates are still significantly lower than fixed.

Make Extra Payments Can you afford to make extra mortgage payments? If you can—do! This way you can reduce your interest and your overall term.

Be Prepared Accept the unavoidable. This is a little more tough lovin’ on our part, but mortgages are going to be more expensive no matter what you do. If you accept this, prepare, and go with the flow, it might make you less stressed. The plus side? We’ll let you know when we find one!

What You Need To Know These raising rates aren’t going anywhere for the foreseeable. But we don’t believe that this should stop you from getting on the housing ladder or investing in properties. If you go into this with clear eyes, up-to-date knowledge, and a clear vision, you can easily ride the waves of inflation.

If you know you need support on this one—contact Green Mortgage now. We’re used to navigating choppy waters and can find a lender who’ll float your boat and give you the best rates possible in these uncertain times.