Trigger Rate Calculator

Trigger Rate Calculator

Determine the interest rate at which your fixed payments cover interest only.

Monthly (12/year) Semi-Monthly (24/year) Bi-Weekly (26/year) Weekly (52/year) Accelerated Bi-Weekly Accelerated Weekly

function calculateTriggerRate() { var balanceInput = document.getElementById('tr_balance'); var paymentInput = document.getElementById('tr_payment'); var frequencyInput = document.getElementById('tr_frequency'); var resultDiv = document.getElementById('tr_result'); var balance = parseFloat(balanceInput.value); var payment = parseFloat(paymentInput.value); var freq = parseFloat(frequencyInput.value); if (isNaN(balance) || isNaN(payment) || balance <= 0 || payment <= 0) { resultDiv.style.display = 'block'; resultDiv.style.backgroundColor = '#ffe6e6'; resultDiv.style.borderLeft = '5px solid #cc0000'; resultDiv.innerHTML = 'Please enter valid, positive numbers for the mortgage balance and payment amount.'; return; } // Calculation Logic // Trigger Rate Formula: (Annual Payment / Outstanding Balance) * 100 // This represents the rate where Interest Cost = Total Payment var annualPayment = payment * freq; var triggerRateDecimal = annualPayment / balance; var triggerRatePercent = triggerRateDecimal * 100; // Format numbers var formattedRate = triggerRatePercent.toFixed(2); var formattedAnnual = annualPayment.toLocaleString('en-US', { style: 'currency', currency: 'USD' }); var formattedBalance = balance.toLocaleString('en-US', { style: 'currency', currency: 'USD' }); // Display Result resultDiv.style.display = 'block'; resultDiv.style.backgroundColor = '#e8f4f8'; resultDiv.style.borderLeft = '5px solid #0073aa'; resultDiv.innerHTML = '' + '' + '

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' + '' + '' + 'Note: Above this rate, your loan may begin negatively amortizing (the balance will grow rather than shrink).'; }

Understanding Your Trigger Rate

For homeowners with a variable-rate mortgage (VRM) that has fixed payments, the "Trigger Rate" is a critical financial threshold. Unlike adjustable-rate mortgages where your monthly payment rises immediately as rates go up, a VRM with fixed payments keeps your cash flow steady, but changes the allocation of your funds. As interest rates rise, a larger portion of your fixed payment goes toward interest, and less goes toward the principal.

The Trigger Rate is the precise interest rate at which your entire fixed payment is consumed by interest costs alone. At this point, you represent zero principal repayment.

How the Calculation Works

The mathematics behind the trigger rate are relatively straightforward. It identifies the break-even point where the annualized cost of borrowing equals your annualized payment contribution. The formula is:

Trigger Rate = (Annual Payment Amount / Outstanding Mortgage Balance) × 100

For example, if you owe $500,000 and your payments total $30,000 per year, your trigger rate is 6.00%. If the lender's rate hits 6.00%, you are no longer paying down your house; you are simply "renting" the money.

What Happens After the Trigger Rate?

If market interest rates rise above your trigger rate, you enter a territory often called the Trigger Point. At this stage, your fixed payment is no longer sufficient to cover the interest due.

The unpaid interest is typically added to your principal balance, a phenomenon known as negative amortization. Essentially, your mortgage balance grows instead of shrinking, even though you are making payments. Lenders will usually contact borrowers at this stage to discuss increasing payments, making a lump sum payment, or converting to a fixed-rate mortgage.

Managing Risk in a Rising Rate Environment

To avoid hitting your trigger rate or managing the fallout if you do, consider the following strategies:

• Increase Payments Voluntarily: Even a small increase in your regular payment can raise your effective trigger rate threshold.
• Lump Sum Payments: Applying a lump sum directly to your principal reduces the balance on which interest is calculated, effectively lowering the interest portion of your future payments.
• Switch to Fixed: Locking in a fixed rate protects you from further volatility, though often at a higher immediate interest rate than the variable option.