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The last few years have been difficult for many Canadian mortgage holders. Thanks to multiple interest rate hikes, homeowners with fixed-payment variable-rate mortgages are experiencing negative amortization. This is when your monthly mortgage payment no longer covers your interest, let alone any of your principal. The extra interest is added to your mortgage balance creating more debt. Instead of paying down your mortgage, it starts to get bigger. 

This article explains what negative amortization is, how it can affect you, and what you can do about it. 

What Is Negative Amortization? 

The amortization period of a mortgage refers to the length of time it takes to pay off the loan in full. In Canada, if your down payment is less than 20%, the longest amortization you can have is 25 years.

Negative amortization occurs when your monthly mortgage payment no longer covers your interest, let alone any of the principal amount. The extra interest is added to your mortgage balance which continues to grow. Negative amortization affects homeowners with variable-rate mortgages

How Does Negative Amortization Affect You?

Negative amortization can affect homeowners in several ways.

  • Your mortgage loan can increase: While you continue to pay your mortgage payment each month, your balance will go up instead of down. 
  • Your payment can go up at renewal: When it’s time to renew your mortgage, your monthly payment could increase significantly. The Bank of Canada (BOC) suggests that median payments will rise by 54% between February 2022 and the end of 2027. If the increase is substantial, you might find you can no longer afford your mortgage.
  • Your amortization period can lengthen: If your monthly payment is only going to interest and you’re not paying any of the principal, you may see a significant increase in the length of your mortgage amortization. Some Canadians have seen their 25-year mortgage rise to 47 years and beyond.

Negative Amortization vs. Trigger Rates

The trigger rate is the point when your monthly payment only covers interest. You’re no longer making a dent in the principal payment. You’re making no progress, just staying afloat. Trigger rates affect homeowners with variable-rate fixed-payment mortgages.  

Ideally, you should consider a new plan when you hit this rate. You might increase your monthly payments or put down a lump sum. 

Unfortunately, some banks allow you to go past your trigger rate. They don’t require you to do anything. This allows your monthly mortgage payments to stay the same, but any interest your payment doesn’t cover is added to your principal. This causes your mortgage to increase, and the length of your amortization period to get longer. 

What Causes Negative Amortization?

Two factors that can lead to negative amortization include variable-rate fixed-payment mortgages and rising interest rates. 

Variable Rate Mortgages

Variable-rate mortgages became very popular during the pandemic when interest rates were at a historic low. Early in 2022, variable interest rates accounted for more than 50% of the share of mortgages.

There are two types of variable-rate mortgages: an adjustable-rate variable mortgage and a variable-rate fixed-payment mortgage. 

With an adjustable-rate variable mortgage, your monthly mortgage payments adjust based on the BOC’s rates. If the interest rate goes up, so does your payment. For some Canadians, this caused their mortgage payments to increase by 70% between February 2022 and November 2023.

With a variable-rate fixed-payment mortgage, your monthly payments stay the same for the term of your mortgage, but your interest rate can fluctuate. If rates go down, more of your monthly payment goes to paying off your loan. If rates go up, more of your payment goes to interest.

Interest Only Payments

When the BOC started raising interest rates in March 2022 until July 2023, Canadians with variable-rate fixed-payment mortgages saw more of their payment going toward interest. For some, the monthly payment didn’t even cover the total cost of interest. 

When your monthly payment can no longer cover the interest, this is negative amortization.

How To Get Out Of A Negative Amortization?

If you’re stuck in a cycle of negative amortization, and you’re worried about your financial future, consider speaking to your bank or a financial professional to understand your options. Some solutions to escape negative amortization can include: 

  • Refinance your mortgage. Refinancing involves looking for a new loan with a better interest rate or term.   
  • Convert to a fixed rate. By converting from a variable to a fixed-rate mortgage, you can start paying down interest and principal instead of just interest. 
  • Increase your monthly payments. You might choose to increase your monthly payments to ensure you’re paying some of the principal and not just interest.  
  • Make a lump sum payment. Providing a lump sum payment on your mortgage can help reduce your balance. 

Dealing With Negative Amortization? Consider Your Options

With historically low interest rates during the pandemic, it’s no wonder variable-rate mortgages gained in popularity. However, the significant rise in interest rates has left many Canadians in a precarious financial situation. If you’re in a position where you’re about to hit your trigger point and go into negative amortization, speak to your lender to see what options are available. Your lender can work with you to try and find a solution and get you back on track. 

Negative Amortization FAQs

Is there a negative amortization limit?

The negative amortization limit for homebuyers who put less than 20% down is 105% of the current property value. The limit for buyers who put down more than 20% is 80% of the home’s value.

What happens if I don’t take any action to get out of negative amortization?

If you are experiencing negative amortization and you do nothing about it, your mortgage balance will continue to grow. You could be in a position where you owe more money than your home is worth.

Are amortization periods extending for Canadians in 2024?

While the standard amortization period in Canada is 25 years, many banks have allowed customers to extend amortization periods to help customers bring down their monthly mortgage payments. Moving into 2024, some banks, such as the Bank of Montreal (BMO), are taking steps to reduce ultra-long mortgages and seeing reductions in negative amortization.
Jessica Martel avatar on Loans Canada
Jessica Martel

Jessica is a freelance writer, professional researcher, and mother of two rambunctious little boys. She specializes in personal finance, women and money, and financial literacy. Jessica is fascinated by the psychology of money and what drives people to make important financial decisions. She holds a Master's of Science degree in Cognitive Research Psychology and Bachelor's degrees in Communications, and Psychology. Her work has been published on Investopedia, The Balance, Money Under 30, Time.com, Seeking Alpha, Consumer Affairs, and more.

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