Renewal Mistakes, Complaints and Official Sources
Fixed-payment variable mortgages at renewal: trigger rates and the payment reset
How trigger rates, trigger points and negative amortization work on Canadian fixed-payment variable mortgages, and why the payment can jump sharply at renewal, with a worked example.
On a variable-rate mortgage with fixed payments, the payment stays the same when prime rises, so more of it goes to interest. If rates rise far enough, the payment no longer covers the interest (the trigger rate), unpaid interest is added to the balance, and the effective amortization grows. At renewal, the lender resets the payment so the balance is repaid over the remaining original amortization, and that reset can be far larger than a normal renewal increase. If you have this kind of mortgage, check your balance and effective amortization on your annual statement now, and plan for the reset well before maturity.
This guide is part of the mortgage renewal mistakes guide. Figures are illustrative.
Key terms
| Term | Meaning |
|---|---|
| Fixed-payment variable mortgage | Rate follows prime; payment does not change when prime changes |
| Trigger rate | The rate at which the payment equals the interest; above it, nothing goes to principal |
| Negative amortization | Unpaid interest is added to the balance, so it grows |
| Trigger point | A balance limit in the contract, often a percentage of the original amount or the home's value, at which the lender can require a higher payment or a lump sum |
| Effective amortization | How long it would take to repay at the current rate and payment; can exceed the original amortization |
Lenders handle these differently. Some raise the payment as soon as the trigger rate is reached; some let the balance grow until the trigger point; all reset to the contractual amortization at renewal. Read your mortgage agreement and the notices your lender sent.
Worked example: from low rates to a reset
Illustrative mortgage taken when rates were low, with monthly compounding as is common on variable mortgages:
- Original balance: $450,000
- Starting rate: 1.45% (prime minus a discount)
- Amortization: 25 years
- Fixed monthly payment: $1,789.16
Trigger rate. The payment covers the interest only while balance x rate / 12 is no more than $1,789.16. On $450,000 that is $1,789.16 x 12 / $450,000 = about 4.77%.
Rate path (simplified). The rate stays at 1.45% for six months, rises to 3.70% for six months, then to 5.95% for the remaining four years. At 5.95%, interest on $450,000 is about $2,231 a month, more than the payment.
Result after five years. The balance is about $461,132, higher than the original $450,000. The household made five years of payments and owes more than it borrowed.
Reset at renewal. The original amortization had 20 years left. The lender resets the payment so the balance is repaid in 20 years. At a renewal rate of 4.70% fixed (semi-annual compounding):
- New payment: about $2,956
- Increase: about $1,167 a month, roughly 65% more than before
Compare that with a household that had a fixed rate or an adjustable variable payment, whose renewal increase was smaller because principal was paid down throughout the term.
Put your own balance and remaining amortization into the renewal payment calculator to see your reset payment.
What to do before renewal
- Find the real balance and effective amortization on your latest annual statement or online banking.
- Calculate the reset payment at a few renewal rates.
- Consider prepaying now, within your privileges, or increasing the payment voluntarily, to bring the balance down before the reset.
- Ask your lender about options. Under the Canadian Mortgage Charter, federally regulated lenders are expected to offer relief to borrowers at risk, without fees for the relief and without charging interest on interest that relief creates. Ask specifically whether a lump-sum payment above your normal privilege would be accepted without a penalty to bring the balance back down. See the Mortgage Charter at renewal.
- Consider an amortization extension if you are uninsured and qualify, understanding the extra lifetime interest. See extending your amortization.
- Compare a switch. A lower rate from another lender reduces the reset, but extending the amortization at the same time makes it more than a straight switch.
Should you choose this product again?
At renewal you can pick any product. A fixed-payment variable mortgage still suits some borrowers, for example those who want a predictable payment and plan to prepay, but it hides rate risk inside the balance. If you choose it again:
- Ask what the lender does at the trigger rate and trigger point.
- Ask whether you will be notified when the trigger rate is reached.
- Calculate the trigger rate yourself: payment x 12 / balance.
- Keep the gap between the trigger rate and the current rate in view.
An adjustable-rate mortgage, where the payment moves with prime, makes rate changes visible immediately. See fixed vs variable at renewal.
Regulators' view
OSFI and the Bank of Canada have both drawn attention to the risks of negative amortization in fixed-payment variable mortgages after the 2022 to 2023 rate rises, and FCAC's guidance asks banks to help borrowers who face payment shock. Check their websites for current guidance and data, which this site does not reproduce.
Watch for the renewal statement, which will show the reset payment; see auto-renewal and the renewal statement. If you did not receive trigger-point notices your contract promised, see how to complain about your mortgage lender.
Frequently asked questions
Did I do something wrong if my balance grew?
No. It is how the product works when rates rise above the trigger rate. What matters now is planning for the reset.
Can my lender raise my payment before renewal?
Yes, if your contract allows it, typically when a trigger point is reached. Lenders usually notify you and offer options such as a lump-sum payment or a higher payment.
Will falling rates fix the problem?
Lower rates help, because more of the payment goes to principal again, but the extra balance remains unless you pay it down.
Is the reset negotiable?
The rate is negotiable as usual. The amortization may be negotiable on an uninsured mortgage, subject to approval. Talk to your lender before maturity.
Sources
- Financial Consumer Agency of Canada — variable-rate mortgages, trigger rates and relief
- Bank of Canada — research on variable-rate mortgages and renewals
- Office of the Superintendent of Financial Institutions — supervisory guidance on mortgage risk
- Department of Finance Canada — the Canadian Mortgage Charter
