Your payment won’t alter over the period if your mortgage has a true variable rate. Many people may feel at ease because this ensures a consistent monthly income flow. With an increase in the interest rate, a higher percentage of that payment will be used to pay interest and a smaller portion will be used to pay principle. But the payout is consistently the same.
However, that does not ensure that you won’t have to make any additional payments during the course of the mortgage.
You may reach a rate known as a trigger rate if the prime rate keeps increasing. At this time, the mortgage payment is insufficient to pay the interest owed.
What happens then?
The additional interest, also known as delayed interest, will be added to the outstanding mortgage balance. Following that, the sum will keep rising with each payment until it reaches the trigger point.
The trigger rate and the trigger point are two distinct concepts. When your mortgage debt surpasses the original loan amount, that is the trigger. This is sometimes referred to as negative amortization and indicates that your amortization duration has increased since the start of your mortgage. As mentioned earlier, the trigger rate.
Once you reach your trigger rate, your mortgage lender will typically let you know. Although every lender may have a different policy on this, it’s probable that you won’t need to do anything right away. But it doesn’t imply you should do nothing while you watch your balance increase from where it was when your mortgage first started.
You can now do the following steps:
Increase your mortgage payment
Your original loan agreement’s trigger rate, which can be located there, will determine the amount of extra payment needed to cover the postponed interest. When you hit the trigger rate, your lender must inform you and provide the deferred interest amount. Then, you might raise your payment to account for the higher interest. I would advise raising your payment if you can comfortably do so in order to pay down some of the debt as well.
Make a lump sum payment
Every additional payment you make on your mortgage is added right to the principal. This will immediately lower your effective amortization, delaying the trigger point or completely removing any chance of ever reaching it.
Convert to a fixed rate
I consistently receive a flood of questions from people with variable rate mortgages asking if they should lock in a fixed rate whenever interest rates rise. This subject alone might fill a whole blog. You would lock in one of the highest fixed rates we have seen in the past 14 years if you choose this choice.
The Bank of Canada will need to switch its emphasis from fighting inflation to safeguarding the economy because a recession is virtually probably on the horizon. They are predicted to start slowing down around 2024, at which point we can anticipate them to start doing so. A rate drop is currently anticipated by a few of the big banks for the last quarter of 2023. Falling bond yields as a result of this will cause fixed mortgage rates to decrease as well.
Anyone picking a fixed rate today who decides to do so will almost definitely be wanting to convert to a lower rate at that moment.
However, your penalty will increase as fixed rates decline further. You may easily reach a point where the penalty would make switching unaffordable, locking you into the costlier fixed-rate mortgage. Although every case can vary a little bit and there is no universally applicable mortgage advice, I believe individuals who choose a fixed rate mortgage now will come to regret their decision in a few years.
Only time will tell, and anything can happen.
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