Negative Amortization

Negative amortization occurs when a mortgage payment is smaller than the interest charged for that period, so the unpaid interest is added to the mortgage balance and the amount you owe grows instead of shrinking.

Which Canadian Mortgages Can Have Negative Amortization?

Negative amortization is not a standard feature of Canadian mortgages. A typical fixed-rate mortgage and most variable-rate mortgages are structured so each payment covers the interest due plus some principal. The situation can still arise in a few places:

• Static-payment variable-rate mortgages. The rate floats with prime rate while the payment stays the same. When rates rise far enough, the payment reaches a trigger rate — the point where it covers only interest. Some lenders then add any shortfall to the balance; others automatically recalculate the payment instead. OSFI's Guideline B-20 expects federally regulated lenders to have clear policies for how and when payments are recalculated.
• Home equity lines of credit (HELOC). Many are interest-only, so the balance never falls on its own, and any payment below the interest owed pushes the balance upward.
• Reverse mortgages. No payments are required, so interest is added to the balance by design.
• Capitalized arrears. If a lender adds missed payments back onto the balance after a period of arrears, the debt increases.

Why It Matters to a Borrower

A growing balance means your home equity does not build, and you pay interest on interest, because the amount added is itself charged interest in the next period. Over time the balance can climb above the original loan amount, raising your loan-to-value ratio and leaving less room to refinance or switch lenders at renewal. It also leaves a larger debt to repay over the remaining amortization period.

How to Spot It Before It Costs You

1. Read the mortgage commitment for terms such as trigger rate, trigger point, or payment recalculation.
2. Ask the lender to confirm whether your payment is fixed while the rate floats, and what happens when the payment no longer covers interest.
3. Compare an adjustable-rate variable mortgage, where the payment moves with the rate, with a static-rate variable mortgage, where it does not.
4. Use prepayment privileges or a lump-sum payment to keep the balance in line, and run the numbers through an amortization schedule calculator to see how the interest-and-principal split changes.
5. Contact your lender early if you believe your payment is short. FCAC publishes consumer guidance on mortgages, and federally regulated lenders must disclose changes to payment terms.