Trigger Rate on Canadian Variable Mortgages: What It Is and What to Do

The mortgage trigger rate became a household term in Canada during 2022–2023, when the Bank of Canada raised its overnight rate from 0.25% to 5.00% in under two years — the fastest tightening cycle in Canadian history. Hundreds of thousands of variable-rate mortgage holders found themselves approaching or crossing their trigger rate. Understanding what it is and what your options are when you hit it matters.

What is the trigger rate?

The trigger rate is the interest rate at which your fixed monthly payment on a variable-rate mortgage (VRM) no longer covers the interest portion of that payment. When that happens, instead of paying down principal, your outstanding balance can actually grow — a situation called negative amortization.

Note that this is specific to VRMs, where the payment amount stays fixed even as the interest rate changes. It does not apply to adjustable-rate mortgages (ARMs), where the payment itself adjusts automatically every time the prime rate moves.

How the trigger rate is calculated

Your trigger rate is the interest rate at which your current fixed payment equals the monthly interest on your remaining balance. The formula is:

Trigger rate = (monthly payment × 12) / remaining balance

Example: You owe $450,000 and your fixed monthly payment is $2,200.

Trigger rate = ($2,200 × 12) / $450,000 = 5.87%

If your variable rate reaches 5.87%, your entire payment is consumed by interest. Above that rate, your balance grows each month instead of shrinking.

What happens when you hit your trigger rate

When your interest rate reaches your trigger rate, your lender is required to contact you. Typically they present three options:

1. Increase your regular payment to cover the full interest plus some principal reduction.
2. Make a lump-sum payment to reduce the balance and bring your payment back into positive amortization.
3. Convert to a fixed rate, locking in a rate for the remainder of your term. Most variable mortgages allow this mid-term without penalty, though the available rate will reflect current market conditions.

If you don't act, some lenders will automatically increase your payment to restore positive amortization. The exact terms depend on your mortgage contract — check yours.

What actually happened in 2022–2023

Canadians who took variable-rate mortgages at the record-low rates of 2020–2021 (some as low as prime minus 1.00%, or about 1.45%) found themselves with trigger rates around 4.5%–5.5% — well within reach of a rising rate environment. By mid-2023, some borrowers' balances were higher than when they took out the mortgage, despite making every payment on time. This was a structural feature of VRMs working exactly as designed, but at a scale few anticipated.

The VRM vs ARM difference

This is worth repeating because many Canadians conflate the two:

Feature	Variable-Rate Mortgage (VRM)	Adjustable-Rate Mortgage (ARM)
Payment when rates rise	Stays the same — more goes to interest	Increases automatically
Payment when rates fall	Stays the same — more goes to principal	Decreases automatically
Trigger rate risk	Yes	No
Cash flow predictability	Higher (stable payment)	Lower (payment fluctuates)

When choosing a variable mortgage, ask your lender or broker explicitly whether it is a VRM or ARM. The distinction matters enormously in a rising rate environment.

What to do if you're approaching your trigger rate

You don't have to wait for your lender to call. Proactive options include:

• Voluntarily increase your payment now. This lowers your balance faster and raises your trigger rate buffer.
• Make a lump-sum prepayment. Most variable mortgages allow 10–20% of the original principal per year. This directly reduces the balance your trigger rate calculation is based on.
• Convert to fixed. If you're losing sleep over rate uncertainty and are near your trigger, a fixed rate provides certainty. You won't get the best advertised rate — you'll get the lender's current conversion rate — but it stops the exposure.
• Do nothing and monitor. If your trigger rate is still 0.5%–1.0% above current rates and the BoC appears to be on hold or cutting, waiting may be rational.

Use our fixed vs variable calculator to compare what your total interest would look like at current and elevated rates, and our prepayment calculator to see how a lump-sum payment affects your amortization and trigger rate buffer.