What is a trigger rate on a variable mortgage?

In Canada, a trigger rate is the interest rate at which the fixed payment on a variable-rate mortgage covers only the interest, with nothing going to principal. If rates rise above the trigger rate, your payment no longer covers the interest. The unpaid interest can then be added to your balance until the lender requires a change.

Two kinds of variable mortgages

With a variable rate, your interest rate usually moves with the lender's prime rate. Lenders handle the payment in one of two ways:

1. Adjustable payments: the payment changes whenever prime changes, so the mortgage stays on its amortization schedule. Adjustable-payment mortgages do not have a trigger rate.
2. Fixed payments: the payment stays the same and only the split between interest and principal changes. When rates rise, more of each payment goes to interest and less to principal. Fixed-payment mortgages are the ones with a trigger rate.

How the trigger rate works

Every payment on a fixed-payment variable mortgage covers that period's interest first, and the remainder pays down principal. As rates rise, the interest share grows. At the trigger rate, the interest equals the whole payment, and no principal is repaid.

If rates rise further, the payment falls short of the interest. Depending on the lender and your contract, the shortfall may be added to your balance. Adding the shortfall to the balance is called negative amortization: you owe more over time, even though you are making every payment.

Your trigger rate depends on your balance, your payment and your lender's calculation method. Your lender can tell you your trigger rate, and the rate may appear on your annual statement.

The trigger point

Many contracts also have a trigger point: a limit on how large the balance can grow compared with the original loan or the home's value. If you reach the trigger point, the lender will usually require you to increase your payment, make a lump-sum payment, or convert to a fixed rate. Each contract sets out its own rules.

Options if you are near your trigger rate

• Ask your lender for your trigger rate and trigger point, and how far you are from each.
• A voluntary payment increase, if your budget allows; it keeps principal coming down.
• A lump-sum payment within your prepayment privileges.
• Converting to a fixed rate, if your lender allows it, for payment certainty.
• Planning for renewal: at maturity, the lender resets the payment on the remaining amortization, which can mean a noticeably higher payment if principal has not been falling.

At renewal you can also compare other lenders. Since November 21, 2024, an uninsured straight switch to another federally regulated lender, with no increase in amount or amortization, does not need to be stress-tested. If negative amortization has extended your amortization, ask us how that affects a switch.

What to do next

If you are worried about your trigger rate or your renewal payment, use our call-me-back form and we will go through your options. You can also compare structures with the fixed vs variable tool.