While we currently take a short break from updating our YouTube Channel with new content (currently being filmed), we wanted to briefly touch on the topic of "Trigger Rates".
Right now, if you are with certain lenders, your variable interest rate may have a static payment option. What that means, is even if the prime interest rate increases, the total monthly payment for your mortgage will remain the same. In exchange for the privilege of having your total payment remain the same, you are slowly adding to your amortization and remaining mortgage life, not decreasing it, due to the increase in interest and decrease in principal repayment.
To keep things easily to follow, let us say for example that your monthly mortgage payment was $2,000 and hypothetically $1,000 was going towards paying down the principal (your outstanding balance) and $1,000 was going towards paying interest. An increase to your prime lending rate in this scenario will increase the interest portion of your payment to say $1,200, and will reduce the principal portion of the repayment to $800. The total is still $2,000, but because your principal portion has decreased and interest portion has increased, you will be adding months and sometimes years to how long it will take you to repay your mortgage.
Keeping all of this in mind, what happens when the prime lending rate increases so much, that the interest portion for the same example above is now $2,000 a month, and the principal being repaid is $0?
This is referred to as the Trigger Point- when the payment becomes 100% interest only and further exceeds that point where your total monthly payment does not cover the total monthly interest cost of your mortgage.
Your trigger rate is likely in the mortgage loan agreement that was signed with your notary or lawyer and if you reach this point, you have two main options; One, you can increase your monthly payment amount to cover the principal cost you are no longer covering with your existing payment. Most lenders allow you to increase your payment frequency by up to 100% without penalty. Two, you can convert your current variable interest rate into an equivalent fixed term. What that means is if there is 2 years and 8 months remaining on your term, you would need to be in a 3-year fixed term to bring that to maturity. Therefor, if your lender allows it, you can convert your variable rate into whatever your current lender is offering new clients on a new 3-year fixed term.
Keep in mind though- when you convert to a fixed term, there is no going back until maturity. You are now locked in, which means no ability to take advantage of future prime rate DECREASES and you give up the ability to have guaranteed penalty of 3-months worth of interest as your potential pre-payment penalty.
If you have any questions about the trigger point with your current mortgage or anything else, please do not hesitate to reach out to either Kevin or Ryan at anytime at firstname.lastname@example.org !