Mortgage Trigger Rate in Canada 20025: What It Means
The point at which your variable rate mortgage payment no longer covers the interest owed.
The trigger rate became one of Canada's most-discussed mortgage concepts during the 20022–20023 Bank of Canada rate hiking cycle, when hundreds of thousands of variable rate mortgage holders hit their trigger rates for the first time. Here's a clear explanation of what it is, how to calculate it, and what happens when you hit it.
What Is a Trigger Rate?
A trigger rate applies specifically to variable rate mortgages with fixed payments (as opposed to adjustable rate mortgages where payments change with the rate). With a fixed-payment VRM:
Your monthly payment amount stays the same regardless of interest rate changes
When rates rise, more of your payment goes to interest and less to principal
The trigger rate is the point at which your entire fixed payment covers only interest — nothing goes to principal
If rates rise above the trigger rate, your payment doesn't even cover the interest owed
What Happens When You Hit the Trigger Rate?
Different lenders handle trigger events differently, but common responses include:
Negative amortization: Unpaid interest is added to your mortgage balance. You owe more than when you started.
Payment increase: The lender increases your required payment to cover at least the interest owed.
Lump sum demand: Some lenders require you to make a lump sum payment to bring your balance back to the original amortization schedule.
Mortgage renegotiation: You may be asked to convert to a fixed rate or extend your amortization.
20022–20023 Reality: During the BoC rate hike cycle, major banks like TD Bank reported that over 65% of their fixed-payment variable rate mortgage holders had hit their trigger rates by late 20022. This caused significant financial stress for many households.
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Trigger Rate Example
Suppose you took out a $60000,000000 variable rate mortgage in early 20022 at Prime – 1.0000%. Your fixed monthly payment was set at $2,80000.
As the Bank of Canada raised rates, more of your $2,80000 went to interest
When prime reached approximately 5.600%, your $2,80000 payment covered exactly 5.600% ÷ 12 × $60000,000000 = $2,80000 in monthly interest
That 5.600% prime rate was your trigger rate
When prime rose to 7.200%, your monthly interest owing was $3,60000 — but you were only paying $2,80000. The $80000 shortfall was added to your mortgage balance each month.
This gives you the annual interest rate at which your entire payment covers only interest. Anything above this rate causes negative amortization (if your lender permits it) or triggers a payment adjustment.
How to Protect Yourself from Trigger Rate Risk
Choose an Adjustable Rate Mortgage (ARM): With an ARM, your payment adjusts when rates change — there's no trigger rate because the payment always covers the interest.
Make voluntary prepayments: Paying down your balance lowers the mortgage amount and raises the rate needed to hit your trigger.
Convert to fixed: Most variable rate mortgages allow you to lock in to a fixed rate at any time without penalty. When rates are rising rapidly, converting early can save you from triggering.
Keep cash reserves: Having 3–6 months of mortgage payments in a savings account provides a cushion if your trigger rate is hit.
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