What is the Trigger Rate for Variable Mortgages?

The mortgage trigger rate is the interest rate where your mortgage payments only cover the interest, with none going towards your principal balance. This could happen in the case of variable-rate mortgages with a fixed payment, where the mortgage rate is based on the lender’s prime rate. As the lender’s prime rate increases, more interest accrues for each period, but because your payments are fixed, less money will go towards your principal balance.

Once interest rates rise above your trigger rate, your payments no longer cover even just the interest. Therefore, hitting the trigger rate can be a concern for variable-rate borrowers if current interest rates are rising significantly in a short time. You can find your trigger rate in your mortgage contract.

Hitting your mortgage’s trigger rate means that your current mortgage payment isn’t enough. Your lender may provide you with some options. This might include:

• Increasing Your Mortgage Payment: While variable mortgages have a fixed payment that doesn’t change, reaching your trigger rate might force your lender to increase your mortgage payment to cover the higher interest costs. This means that you’ll need to pay more money every month, and your mortgage payment might be required to increase even further each time interest rates rise.
• Adding Unpaid Interest to your Principal: Called negative amortization, this is when unpaid interest is added to your principal balance, which increases the total amount you owe. It’s called “negative” amortization because the loan balance is increasing, rather than decreasing as it normally does with amortization.
• Switch to a Fixed Interest Rate: To avoid the possibility of further rate hikes and their impact on your variable mortgage, your lender might give you the option of switching to a fixed rate mortgage. Or, they might give you the option of making a lump-sum payment to pay down unpaid interest.

When your mortgage hits its trigger rate, the lender may automatically apply one of the above options without even informing you. For instance, your lender might automatically increase your variable mortgage rate payment to cover the increased interest. If you can’t afford an increase in payments, contact your lender to discuss options.

A mortgage trigger point is hit when you owe more money on your mortgage than your original principal balance. That could happen if your lender allowed for negative amortization, and unpaid interest is added to the amount you owe. Eventually, the added unpaid interest may cause your mortgage balance to be larger than the amount that you borrowed in the first place!

Once you hit your trigger point, continuing to add interest to your principal might not be an option anymore. Your lender may require you to increase your mortgage payment, make a lump-sum payment, or switch to a fixed-rate mortgage.

This page has a mortgage trigger rate calculator that gives an approximate value of your trigger rate. You can also manually calculate your trigger rate. To find your trigger rate, you’ll need to find the point where interest is the only payment being made, based on a certain fixed mortgage payment amount. That can be done by simply setting your mortgage payment as the interest, then calculating it for a year to get an annual interest rate.

The formula for the trigger rate is roughly:

The number of payments per year would be based on your mortgage payment frequency, with common frequencies being monthly and bi-weekly payments. Use the table below to see what number to use.

Number of Payments per Year

For example, let’s say that you have a $500,000 variable rate mortgage with a monthly payment of $3,000. What would your trigger rate be?

Since you’re making monthly payments, there will be 12 payments in a year. If interest made up the entire payment amount, you’ll be paying roughly $36,000 in a year, not considering if the principal balance goes down and assuming the rate stays the same. On a $500,000 balance, that works out to be 7.2% of $500,000. In other words, the trigger rate would be 7.2% if your monthly payments were fixed at $3,000 on a $500,000 mortgage.

What if you make bi-weekly mortgage payments? In this case, the number of payments per year would change in this calculation. If your bi-weekly payments were $1,500 each, then your trigger rate would be 7.8%.

The trigger point is when you owe more money than you originally borrowed, and is an effect of hitting your trigger rate. Let’s say that your original principal balance was $500,000 with a variable mortgage rate of 3%. After a certain period of time, your regular mortgage payments have caused your principal to decrease to $450,000. You’ve paid down $50,000 of your principal balance.

Now let’s say that prime rates increase by 4%, something that occurred in 2022, which means your variable mortgage rate might now be 7%. You’ve hit your trigger rate, and your lender allows for negative amortization. As unpaid interest gets added to your principal, the balance that you owe will grow. If $50,000 worth of unpaid interest gets added to your principal, you’ve now hit your trigger point. Your principal balance is now $500,000, and may continue to increase, which is more than your original balance.

According to research data published by the Bank of Canada in November 2022, about half of variable-rate mortgages hit their trigger rate by October 2022. This accounted for 13% of all Canadian mortgages at the time. The Bank of Canada expected the percentage of variable-rate mortgages hitting their trigger rate to increase to 65% by mid-2023.

The chart below shows the percentage of variable mortgages that would hit their trigger rate based on the Bank of Canada’s calculations in October 2022. With a variable rate of 4.1%, only 5.3% of mortgages would hit their trigger rate. At 6.1%, then 76.8% of mortgages would have hit their trigger rate.

% of Variable Mortgages Hitting Their Trigger Rate

Source: Bank of Canada