The Financial Impact of Hitting the Mortgage Trigger Point

Pointing GunImagine someone pointing a gun at you and your future hangs on that person’s finger pressing against the trigger. It’s a situation none of us ever want to face. Unfortunately, there is a similar situation happening to many people these days. It even has a similar name: trigger point.

What’s a Trigger Point?

So what exactly is a trigger point? This expression is commonly used by mortgage lenders to describe what happens when interest rates rise. Unfortunately when interest rates rise more of your mortgage payment has to be dedicated to the rising interest costs against the principle. When your entire mortgage payment is needed just to satisfy the loan interest, you are said to have hit the trigger point. Just like a gun pointed at you, this is a bad situation.

Potential for Disaster

helpMost people would never have imagined this could happen when they bought a home. With historically low interest rates hovering near zero percent and record high home prices the stage was set for this unfortunate situation. This setup for potential disaster was exacerbated for those who stretched their finances and bought the most home they qualified for. With no margin of safety, the rise in interest rates coupled with sky high mortgages on overpriced homes put many in this vulnerable position.

When Is the Trigger Pulled?

So, when do the mortgage lenders actually pull the trigger? The “trigger” is directly connected to the lock in time when your mortgage comes up for renewal. At that time you must renew with your lender and they will assess the loan. That’s the best case scenario where you have some time to prepare for higher monthly mortgage payments. Unfortunately, depending on the lending institution and terms of the loan the trigger point can automatically force a loan reassessment.

The Bottom Line

Regardless, the bottom line is you must pay more per month, make a lump sum payment, or consider extending the length of the mortgage. Needless to say none of these options are favourable to the homeowner.

Why Is this Situation Different?

This situation is a sign of the times. For previous generations that experienced high interest rates in the five to ten percent range (and higher) the threat of rising mortgage payments was ever present. Knowing that it could happen, people practised restraint and built in a buffer to their mortgage payments to allow for that possibility.

With the latest generation seeing record low interest rates the possibility of higher rates was unthinkable. The desire to own a home “at any cost” prevailed. When the inevitable happened and rates not only rose, but rose at a historically fast pace, many were caught off guard.

Who’s to Blame?

blameJust as a finger can pull a trigger, it can also be used to point towards blame. Are the mortgage lenders to blame?

Absolutely. They knew the buyers were stretched thin and rising interest rates would trigger higher payments or defaults. While they were obligated to warn the buyers of the consequences of rising interest rates I suspect those warnings fell on deaf ears.

Ultimately the buyers themselves must accept their portion of the blame. Buyers foolishly believed interest rates would remain historically low forever. People overextended themselves and bought the maximum house they could afford with little buffer against higher mortgage rates.

Buyers knowingly bought into a historically red hot real estate market flooded with overpriced homes. It’s bad enough having a gun pointed at you. It’s even worse when you are holding the gun and your finger is on the trigger.

The Largest Investment of Our Lives

For most of us the largest investment we’ll ever make in our lives is a home. When we practice restraint and live within our means a home purchase can indeed be a great investment. But, for some, stretching the purchase price of that investment and leaving little room against the threat of rising mortgage payments was a costly mistake.

David has a great article on Smart Strategies for Thriving Amid Financial Challenges.

No home is worth owning at any cost especially when the mortgage squeezes out a huge percentage of your monthly income and compromises your ability to save for the future.

How has the rise in interest costs impacted your finances? Leave a comment below letting people know your feelings.

Water BarrelThe BalanceIn my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.

As always, I am not a qualified financial advisor. I just relate financial management to my own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of mine came from expensive experiences.

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