There has been some talk lately in the news about trigger rates. I am going to explain what
they are and how they can affect you.
What are trigger rates…
We are currently facing rising interest rates (although hopefully we are approaching the peak in 2023). If you have a variable-rate mortgage you might be getting close to your trigger rate. What does that mean? As the interest rate rises, your payment on your variable-rate mortgage may not be covering the interest accrued each month. Basically, your payment is only covering part of your interest payment, and nothing is going down on the principal portion of your mortgage. This excess interest is called “deferred interest” and is added to the principal each month. This is “negative amortization” and crates a situation where you actually owe more on your mortgage each month instead of paying it down.
What happens when I reach the trigger point…
Your individual mortgage will define what you must do if you reach your trigger point.
Generally, though, you will have 4 options when this happens:
- Increase your amortization. Spreading the mortgage over 25 instead of 20, for
example, will lower the interest portion of the payment and put you back into
positive amortization - Ask you lender to switch you to a fixed mortgage. This will help you avoid the trigger
point. - Increase your payment. For many this is the easiest solution, if the increased
payment is within your monthly budget. - Make a lump-sum payment on your mortgage, which will go directly on the principal
and thereby reducing the amount of interest each month. Most mortgages allow up
to 15% of the original mortgage amount each year as a lump-sum payment. So, for
example, if your original mortgage was $400,000, each year you could make up to a
$60,000 lump-sum payment. This is not an option for everyone, but may be a good
use of extra cash if it’s on hand.
If you are concerned about your current mortgage, and trigger rates, or for any other mortgage
questions, please contact me for a no obligation discussion!