Capitalization Options for Variable Mortgages that have Reached their Trigger Point

If you have a variable-rate mortgage with fixed payments, rising interest rates may have pushed you past your trigger point — where your payments no longer cover the interest. When that happens, lenders may offer a solution: capitalization. But what does that really mean?

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Have a Variable-Rate Mortgage and Feeling the Heat?

You’re definitely not alone. After a year of aggressive rate hikes by the Bank of Canada (BoC) — with seven increases pushing the overnight rate from 0.25% to 4.25% — thousands of Canadians with variable-rate mortgages (VRMs) are now hitting their trigger rates and staring down their trigger points.
If your payments haven’t changed but your interest rate has, your mortgage might now be growing instead of shrinking. This article breaks down what a trigger point is, why it matters, and what your options are if you’re nearing (or have hit) it.

What is a Trigger Point?

A trigger point occurs when your mortgage balance actually becomes greater than your original loan amount. How does that happen?
Every mortgage payment is made up of principal and interest. When interest rates rise — especially fast — more of your payment goes to interest and less to principal. When rates get high enough, your entire monthly payment may only cover interest, with no principal being repaid. That’s when you hit your trigger rate.
If rates rise beyond that and your payment doesn’t change, the interest that isn’t covered gets added to your loan balance. Over time, your debt grows — until you owe more than you originally borrowed. This is the trigger point.

Mortgages Affected by Trigger Points

This mainly impacts variable-rate mortgages with fixed payments — especially those taken from 2020 to early 2022 when rates were ultra-low. These were popular because they offered flexibility and savings — until rates shot up.
Today, about 20% of Canadian mortgages are believed to be at or near their trigger rates. But whether you actually hit the trigger point depends on your original loan-to-value (LTV) ratio, and how your mortgage was structured.
Insured mortgages (less than 20% down payment) and uninsured mortgages (20%+ down) may face different lender requirements. However, anyone with a VRM and a fixed payment strategy could be at risk — particularly if your property has also decreased in value, reducing your equity.

Solutions Offered by Banks

Most major banks — RBC, TD, Scotiabank, BMO, CIBC, National Bank, Desjardins — offer similar options once you hit your trigger rate or trigger point:

1. Increase your monthly payment to cover more of the interest.
2. Make a lump-sum prepayment to reduce your balance and bring your amortization back on track.
3. Switch into a fixed-rate mortgage or refinance, often with requalification.

Some banks proactively reach out when your trigger rate is hit, but not all do. However, federal rules require lenders to take action when the trigger point is reached, especially for insured mortgages. Your amortization must be brought back in line, especially at renewal.

Example:

A mortgage starting in 2020 with a 25-year amortization and 1.40% variable rate could now show a projected amortization of over 120 years — clearly unsustainable. In this case, your bank will contact you and require changes.
Note: nesto clients are unaffected because nesto only offers fixed or adjustable-rate mortgages (ARMs), which adjust payments with the prime rate. This avoids trigger rate risks altogether.

Options from Default Insurers

If your mortgage was insured by CMHC, Sagen, or Canada Guaranty, you may be eligible for special accommodations:

• CMHC allows amortization to go up to 105% of the original loan amount in certain hardship cases.
• Sagen permits amortization extensions up to 40 years, as long as your gross debt service (GDS) ratio is under 39%.

Insurers also let lenders restructure loans without prior approval in many cases. However, you must still qualify under the lender’s or insurer’s affordability guidelines.
For uninsured mortgages, policies vary by lender and are overseen by OSFI.

FAQ

What is a Trigger Rate?
It’s the rate at which your entire mortgage payment is used up by interest — no principal is being paid down.
What is a Trigger Point?
It’s when your mortgage balance grows beyond the original loan amount. This typically results in lender intervention.
What is Loan-to-Value (LTV)?
It’s your mortgage balance divided by your home’s value at the time of mortgage origination. Lower LTV = more equity.

Final Thoughts

Canada’s housing market might have fared better if more borrowers had chosen fixed-rate mortgages during the pandemic’s low-rate frenzy. But hindsight is 20/20.
If you’re on a VRM and nearing your trigger point, the time to act is now. Contact your lender or broker, understand your specific contract terms, and explore your options — whether it’s refinancing, switching products, or renegotiating payments.
And if you’re planning a purchase or renewal soon, speak to a commission-free mortgage expert at Mortgage.Expert. We’ll guide you through your options, stress test included.

Why Choose Mortgage.Expert

At Mortgage.Expert, we help you make informed mortgage decisions — especially in uncertain times. Our experts offer transparent, personalized advice with no commissions, so your best interest always comes first.
Let’s talk trigger points — before they trigger problems.