The basics of a trigger rate
With a fixed payment variable mortgage, your monthly payment stays the same even as rates fluctuate, but the portion going to interest versus principal shifts. The trigger rate is the point where your entire payment only covers interest, with nothing left for principal.
What happens when you hit it
Once your mortgage reaches its trigger rate, your lender typically requires action, which could mean increasing your payment, making a lump sum payment, or in some cases converting to a fixed rate to stop the balance from growing.
- Payment may need to increase to cover interest fully
- A lump sum payment can bring the balance back in line
- Some lenders allow a switch to fixed rate as a solution
Why some borrowers didn't see it coming
Fixed payment variable mortgages were popular because the payment amount felt predictable, but many borrowers didn't realize how sensitive their amortization was to rate changes until they received a notice from their lender.
How to protect yourself going forward
If you have a variable rate mortgage, ask your lender directly what your current trigger rate is and how much room you have before reaching it. Making extra payments when you can gives you a cushion against future rate movements.
Frequently asked questions
- Does every variable rate mortgage have a trigger rate?
- It mainly applies to fixed payment variable mortgages. Adjustable rate mortgages, where the payment itself changes with rates, generally don't have this issue.
- Will hitting my trigger rate hurt my credit?
- Not directly, but if you don't respond to your lender's request to address it, unpaid interest accumulating could eventually lead to bigger financial issues.
- Can I avoid trigger rate issues by switching mortgage types?
- Yes, switching to a fixed rate mortgage removes trigger rate risk entirely, though it may come with a different rate and terms depending on your lender.