A borrower with a variable rate mortgage experiences a significant rate increase. Their payment remains the same but now only covers interest. What has occurred?
Correct Answer
D) Trigger rate activation
The trigger rate is the interest rate at which the borrower's payment only covers the interest portion, with no principal reduction. When rates rise to this level, lenders typically require payment increases or other adjustments to ensure principal reduction continues.
Why This Is the Correct Answer
Option D is correct because the trigger rate is precisely defined as the interest rate level where a borrower's payment amount only covers the interest portion of their mortgage, with no principal reduction occurring. When variable rates rise to this threshold, the payment structure shifts from covering both principal and interest to covering interest only. This is a specific mortgage industry term with a precise technical meaning that matches exactly what the question describes.
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A borrower wants to purchase a $600,000 home with a 15% down payment. What type of mortgage will they need and what insurance is required?
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A borrower has a variable rate mortgage with fixed payments. After several Bank of Canada rate increases, the payment stopped covering the interest, and the unpaid interest added to the balance has now pushed it past the trigger point in the mortgage contract. What happens next?