As I understand things, people with variable-rate mortgages should be very worried about their minimum mortgage payments increasing. They are facing trigger rates on their mortgages. These rates force people to make higher minimum mortgage payments.
A variable rate mortgage (VRM) payment covers interest and principal. However, when the mortgage rates increase on VRMs, the portion of each payment going to interest increases too. This leaves a smaller portion of the payment going to the principal on the mortgage loan. Let’s say your payment is $500 at X-interest rate, and $300 goes to interest while $200 goes to principal. When the interest rates goes to X+Y%, then your payment stays at $500 but now $375 goes to interest and only $125 goes to principal. If Y is high enough, then you’re in deep doo-doo because all of your $500 payment will be going to interest.
I’ll say it louder for the people at the back. If the mortgage rate on a VRM gets high enough, then the entire mortgage payment is going towards interest on the debt. None of the payment is going towards mortgage principle. This is a very bad situation because it means that the mortgage balance is not being paid down at all.
Enter trigger rates. These are the mortgage rates on VRMs which trigger an increase in the mortgage payment on a VRM. The increased mortgage payment ensures that atleast some of the new, higher mortgage payment goes towards the principal. In other words, the borrower will be paying down the mortgage balance instead of seeing their entire payment going to interest. Once the trigger rate has taken effect, borrowers are now legally required to pay the higher mortgage rate. If borrowers fail to pay the new, higher mortgage payment, they face the prospect of foreclosure.
If you have a variable rate mortgagee, talk to your lender about trigger rates. Find out if you’re close to yours. The lower your variable-rate mortgage is, the more likely you are to see an increase in your minimum required mortgage payment. You need to do two things at this point. First, find out from your lender what you new mortgage payment will likely be. Second, ensure that your budget can handle the increased payment.
Should your mortgage payment be on track to increase, then there are a few things you can do to stave off foreclosure. The first one is to start making extra payments on your mortgage to bring down the principal balance. Do not deplete your emergency fund to do this! Instead, pick up a part-time job or start a side hustle. Put all of that money towards your mortgage. If you earn a promotion at work, apply your additional take-home pay to your mortgage balance. Should you receive a lump sum of money, put it against your mortgage balance.
A second good option is to cut the extra fat from your budget. Eating at home more often will reduce costs since the food you make for yourself is generally less expensive than restaurant & take-out. Maybe you give up some monthly subscriptions. Perhaps you start hosting more potlucks. If possible, perhaps you switch to transit for your commute to work if working from home is no longer an option. Assuming that keeping your home is a priority, the money to pay the higher mortgage payment has to come from somewhere.
Your third option is to get a roommate & apply their rent to your mortgage. When it’s time to renew your mortgage, carefully consider the option of a fixed rate mortgage. (In the interest of transparency, I will tell you that I’ve always had fixed rate mortgages on my properties. I paid a little more in interest but the peace of mind was worth it to me. You may make a different choice.)
Fourthly, get rid of your mortgage completely. Pay off your mortgage, if you can.
Finally, sell your house before you’re underwater on your mortgage. If you don’t think you can pay the new, higher mortgage payment, then you can always sell your home before the bank does. A foreclosure will do significant damage to your credit rating. It stays on your credit report for seven years. If you sell your home, then there’s no foreclosure and you can preserve your credit. I’m not suggesting that you do this if you don’t want to but I want you to know that it’s an option.
The impact of trigger rates are just slowly seeping into the collective consciousness of those with mortgages. For the past 20 years, mortgage rates have simply been falling. No one has had to worry about their minimum mortgage payment increasing if they held a variable rate mortgage. Trigger rates were a theoretical idea – they simply didn’t impact anyone.
Today, the mortgage landscape is much difference. Those of you with VRMs are likely facing trigger rates. You need to start calculating how your budget is going to accommodate the higher minimum mortgage payment that is likely in your future. Be proactive and gather the knowledge you need to make an informed decision about your next steps.