The Bank of Canada again raised its benchmark interest rate on Wednesday, hiking the cost of borrowing for Canadians, especially those who own their home.
But while some fixed-rate mortgage holders fearfully eye their renewal date, and homeowners with an adjustable rate search once again for extra room in the monthly budget, another subset of Canadians have been bracing for the so-called “trigger rate” and “trigger point” to activate on their mortgages.
The Royal Bank of Canada signalled last month during the company’s earnings call that some 80,000 variable-rate mortgage holders will hit their trigger rate in the “next couple of rate hikes.”
So what are the trigger rate and trigger point (they’re different things, confusingly) and how big a pain will they be for Canadian homeowners in the months to come?
Here’s what you need to know.
Who needs to know about the trigger rate?
These triggers are not something all mortgage holders need to worry about, explains James Laird, co-CEO of Ratehub.ca and president of CanWise Mortgage Lender.
Fixed-rate mortgages, as well as adjustable-rate mortgages — the kind that see monthly payments rise or fall immediately in step with changes to the Bank of Canada’s policy rate — don’t have trigger rates.
It’s people with variable-rate mortgages with fixed or static payments, who need to pay attention.
When interest rates rise, as they’ve done five times so far this year, Canadians with these kinds of mortgages do not typically see their monthly payments change.
Rather, rising rates see them pay down more of the interest and less of the principal on their mortgage, which ends up extending the amortization or overall length of their loan.
The trigger rate occurs when you’re no longer paying down any of the principal on your mortgage and are only paying interest, Laird explains. This means that, in effect, your mortgage is growing instead of shrinking because your monthly payments aren’t covering all the interest accumulating on your loan.
But even when you’ve hit the trigger rate, there’s one more step before you’re forced to act.
“You don’t have to do anything when you hit your trigger rate. You do have to do something when you hit your trigger point,” Laird says.
What’s the trigger point?
The trigger point is what might warrant a call from your bank, broker or other mortgage lender. Here’s how Laird breaks it down.
When you’ve surpassed the trigger rate and your outstanding balance on the loan exceeds the principal — the original amount of your mortgage when you purchased your home — that’s the trigger point.
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The exact dollar amount or loan-to-value ratio that represents the trigger point for your mortgage can vary from lender to lender.
Laird gives the example that if you put down 20 per cent on the purchase price of your home, once you’ve passed the trigger rate, you’re allowed to stick to your current payment plan until the outstanding balance on your mortgage hits 80 per cent of your home’s value.
He says that if you didn’t put down 20 per cent — meaning you got default insurance on your mortgage — the trigger point typically comes when the balance owed hits 105 per cent of your current property value.
It’s at this stage that you’ll likely get a call from your lender requiring some action to get you back on track to pay your mortgage, Laird says.
In the simplest of cases, the remedy means paying more. You could do this via a lump sum to pay down your mortgage — thereby reducing the amount of principal and dropping it back below the trigger point — or by increasing your monthly payments so that you’re paying down more than just the interest each month.
You don’t have to get back to your original amortization all at once, Laird says, which he notes would be a very hefty penalty to force on a mortgage holder.
Your lender or broker could have other solutions for you if additional payments aren’t possible, Laird says, such as adjusting the length of your mortgage.
But it’s in your best interest to bring up any concerns about cash flow before hitting the trigger point and find a solution before missing payments or defaulting on the loan, he adds.
“If someone’s in a difficult situation now, like ever, communication with the lender is imperative,” Laird says. “If they can understand how you can get back on track, then they will likely accommodate you.”
How big a deal is the trigger point?
For most variable-rate mortgage holders, hitting the trigger point could mean paying a couple of hundred extra dollars per month, Laird says.
This should be doable, he adds, given that all homebuyers from the past few years have been stress tested to rates of at least 5.25 per cent — a bar most variable-rate mortgages are still below even after Wednesday’s rate hike.
But in addition to rising interest rates, homeowners have had to factor decades-high levels of inflation into their monthly budgets for much of 2022, ratcheting up the pressure on many households at the same time they’re forced to stomach higher mortgage payments. Some might even be dealing with job losses or sudden costly health concerns.
As hard as it is to find the extra cash right now, Laird expects most households will prioritize making payments on a mortgage to keep the roof over their heads. He expects few defaults as a result of more Canadians hitting their trigger point as a result.
“Is it easy to find an extra $200 per month? Absolutely not,” he says. “But … any household is going to cut back on other things, even things that they think are very important before they get to that point where they default.”
RBCs Neil McLaughlin, group head of personal and commercial banking, said during the bank’s earnings call last month that fewer than 0.5 per cent of customers would require a phone call about trigger points.
‘More education’ about triggers needed
With the Bank of Canada signalling more hikes to come and more Canadians nearing those triggers, Laird says there “needs to be more education” about the concept. Other mortgage experts agree that understanding around the topic is sorely lacking.
“I would say the overwhelming majority of Canadians never heard of a trigger rate before this year,” mortgage rate analyst Rob McLister tells Global News.
That’s a problem, he argues, as many Canadians were put into variable-rate mortgages “improperly” during the pandemic, when rock-bottom interest rates made these loans a temporarily cheap way into the market.
But as inflation began to rise last year, mortgage professionals should have been more cautious about putting some buyers into variable rates, knowing those low interest rates would almost certainly rise in short order.
“Putting all these pieces together, if you’re a professional mortgage advisor, there’s some people that just are not suited for a variable,” McLister says.
Trigger rates should not end up being a major “macroeconomic risk” for the Canadian housing market unless the global supply sees another significant hit that keeps inflation higher for longer, McLister argues.
“All it takes is one shock,” he says.
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