Many news articles have talked about how hundreds of thousands of Canadians are at risk of reaching their mortgage trigger rate depending on what the Bank of Canada does with its interest rates this fall. I will explain why only a minority of homeowners may see an impact and share why some news headlines that appear scary do not have that much substance.
You can also follow me on Instagram: @koukun.unosawa
In today's video, we'll talk about how 750,000 Canadian mortgages will potentially reach their trigger rate tomorrow when the Bank of Canada announces its interest rate potential hike. We're going to go into how that actually impacts you. If you hold a variable rate mortgage with a fixed payment. So what is a trigger rate? A trigger rate is when your mortgage interest exceeds your mortgage payment. This is a rare scenario to ever happen, except now with rising interest rates. If your payments stay the same, there is this odd scenario where the interest is more significant than your monthly payment. Why does that matter? So when the interest is the entire payment, obviously, none of that is going to the principal. Your payment becomes interest only. The way it works is that the payments increase only when the accrued interest increases the mortgage balance to 105% of the initial mortgage. Essentially, this is negative amortization. At least for the term. So it is a massive benefit for those with these fixed, variable mortgages. If you're going to pay off the mortgage quickly, this doesn't help you because you're paying extra. For those of you who are real estate investors, I sincerely appreciate this benefit because it allows my property to keep its positive cash flow by keeping the payments the same. How does this all affect you? So when it comes to real estate investing, this is my simple framework I want to own a good house in a good neighbourhood that will get me, good tenants. In my mind, the margin of safety comes when you have positive cash flow. Of course, I want the best deal I can get, but that does not determine the margin of safety. The margin of safety is can your income cover your expenses, and can you have an extra surplus? That is the most significant margin of protection you can have when you have a leveraged property. So it allows you to keep that cash flow consistent. If not growing, it will enable you to do the third thing, which is the hardest of all, to do nothing to buy the property, rent it out, and sit back and let it do its thing. Do something else, make your career, and enjoy time with your family. Just leave the real estate alone. To produce the results for you. Doing these three things, I believe, is a framework for incredible success in real estate investing and the margin of safety is something we focus on a lot here. We do a lot of real estate deals where we're doing crazy amounts of renovations to create positive cash flow because that protects us. We need that margin of safety. We need the properties to be in good neighbourhoods. We don't want to buy properties in the roughest parts of town where we're not going to attract good tenants. And just have hassle. Because of those types of properties, it's hard to do anything. It's hard to hold onto it for an extended period because of the headaches going to face, so these three things, in combination, I believe, will result in significant real estate success, and the trigger rate is all part of that. So hope you found this video helpful! If you have a mortgage with TD and you've called them to ask them about the trigger rate, let me know in the comments below. I don't actually have a mortgage with TD, so I haven't been able to find out just how they treat trigger rates. And if you have any questions about trigger rate comments, definitely let me know in the comments below!
