With rising inflation and today's economic conditions, it's all about savings and cash in our pockets. One of the biggest hits is paying your mortgage and this is why it becomes important to understand with rising interest rates, when will your mortgage payments might increase.
As the interest rates on Variable Interest Rate Mortgages (VIRM) and FlexLine/HELOC Variable Rate Term Portions (VRTP) increase, there will be a point where the principal and interest payments can no longer cover the interest charged. The rate at which this happens is known as Trigger Rate. The VIRM and VRTP will have an increasing balance unless the Customer intervenes and increases their regular payments enough to cover the outstanding interest at a minimum.
With VIRM your regular payment does not change when the prime rate changes. However, a change happens behind the scenes, and the interest portion of the payment changes.
For example, if you have a mortgage payment of $2,500 and $1,600 goes towards the principal, and $900 goes towards interest, if the prime goes up, your payment would still stay $2,500 with a VIRM, however, only $1,300 might now go towards the principal and $1,200 towards interest.
A customer would first reach the Trigger Rate and if they do nothing, they might reach the Trigger Point. VIRM can exceed their trigger rate until they reach what is known as a balance called the Trigger Point.
VIRM (Conventional or 30 years)
The Trigger Point is when the principal amount plus deferred interest owing exceeds 80% of the fair market value of the property based on the original lending value
VIRM (Insured or 25 years)
The Trigger Point is when the principal amount plus deferred interest owing exceeds 105% of the original principal amount of the mortgage loan
When this happens, you will be required to adjust your payments, make a prepayment, or pay off the balance of the mortgage.
What happens once a customer reaches the trigger point?
1. Make a lump sum payment
2. Increase P&I payment
3. Convert to fixed rate term
The Financial Institutes or Banks will notify the Customer of how much the principal amount exceeds the trigger point (the excess amount). Once notified, the Customer will have 30 to 60 days to choose from the above 3 options