A trigger rate is the interest rate threshold in a fixed-payment variable rate mortgage where your regular payment no longer covers any principal repayment. When this happens, your entire payment goes toward interest and your mortgage balance begins to grow instead of shrink.
You should check your mortgage statement online to see how much of your payment is currently going toward principal versus interest. If you took your variable rate mortgage close to March 2022 with a small discount to prime, you are more likely to be near your trigger rate after the September and October 2022 rate increases.
When you reach your trigger point, your lender will typically ask you to make a lump sum payment against the loan, convert to a new fixed rate term, or increase your mortgage payments to pay off the outstanding principal within the remaining amortization. Dalia recommends avoiding fixed terms longer than one or two years because you risk locking in at the height of the rate increase cycle.
If you do nothing, the unpaid interest will be added back to your principal balance each month. Once your outstanding balance grows back to the original mortgage amount, you reach the trigger point, at which point the lender may reset your payment or recall the mortgage.
An adjustable variable rate mortgage is a product where your payment automatically changes as interest rates change. This allows you to continue paying down principal according to your original plan instead of facing lump sum demands or locking into a fixed rate you do not want.
