A borrower's mortgage reaches the trigger rate on their variable rate mortgage. What does this mean?
Correct Answer
C) The entire mortgage payment now goes to interest with no principal reduction
The trigger rate is reached when rising interest rates cause the entire fixed payment amount to go toward interest, with no portion reducing the principal balance. At this point, lenders typically require borrowers to either increase payments or make a lump sum payment to ensure principal reduction continues.
Why This Is the Correct Answer
Option C correctly identifies that at the trigger rate, the entire fixed mortgage payment is allocated to interest with zero principal reduction. This occurs because rising variable interest rates have increased the interest portion of the payment to equal the total payment amount. Under Canadian mortgage regulations and lender policies, this situation typically triggers mandatory action from the borrower to restore principal reduction, either through increased payments or lump sum contributions. This mechanism protects both lender and borrower from indefinite amortization periods.
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A borrower's mortgage payment increases beyond their ability to pay due to interest rate changes. The lender agrees to extend the amortization period to reduce monthly payments. What risk does this create for the borrower?
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A borrower's variable rate mortgage has reached the trigger point. The outstanding balance is now higher than the original mortgage amount despite making regular payments. What is the most likely explanation and immediate consequence?