Ratebuzz
What is Trigger Rate for Variable Mortgages
You may have a mortgage or a loan with a variable interest rate and fixed payments. When interest rates rise, you may reach your trigger rate. Your trigger rate is the interest rate at which your mortgage or loan payment only covers interest costs. When you reach your trigger rate, none of your payment goes toward paying down the principal. This means that your payment doesn’t cover the full amount of interest for that period. When this happens, your bank will generally add the unpaid interest to the balance you owe on your mortgage or loan. This brings you into negative amortization.
If you reach your trigger rate, your financial institution may require you to:
- increase your payments
- make additional payments to cover the excess interest
- change to a fixed rate mortgage or loan
If you’re not at the maximum amortization period allowed, your financial institution may offer to extend your amortization. This would avoid having to increase your payments. However, extending your amortization means paying for a longer period and paying more interest in the long run.
