5 Ways to Get Out of Negative Amortization on Your Mortgage

When you take out a mortgage in Canada, the goal is pretty simple: make your monthly payments and slowly build equity over time. But what happens when your payments aren’t enough to even cover the interest? That’s when you slip into something called negative amortization — and it can be a serious red flag for your financial health.
In this guide, we’ll break down what negative amortization is, how it happens (especially with variable-rate mortgages), and most importantly, five ways to get out of it before it affects your ability to refinance, renew, or even sell your home.

What is Negative Amortization?

In a typical mortgage, every payment you make chips away at the principal while covering the interest. But in negative amortization, your monthly payment isn’t even enough to pay off the interest. That unpaid interest? It gets added to your loan balance. So instead of going down, your mortgage grows.
This can happen most often with:

• Variable-rate mortgages (VRMs): When interest rates rise sharply, your fixed monthly payment may no longer cover the increased interest charges.
• Interest-only payment plans: These delay paying down the principal entirely, and if rates rise or the plan ends, you could be hit with higher-than-expected payments.

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How Does Negative Amortization Happen?

Let’s say you have a variable-rate mortgage with fixed payments. If the Bank of Canada increases interest rates, your lender may continue charging you the same monthly payment. But that payment might not cover the full interest anymore. Instead of raising your monthly payment automatically, the lender adds the shortfall to your mortgage balance.
This creates what’s called a trigger rate scenario — a point where your payments need to increase, or else your debt continues to balloon. If it goes unchecked, you can owe more than you originally borrowed.

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5 Ways to Get Out of Negative Amortization

1. Increase Your Mortgage Payments

The fastest and most direct way to deal with negative amortization is to pay more. Increasing your regular monthly payment or making lump-sum contributions can help you:

• Catch up on unpaid interest
• Reduce your total loan balance
• Get back on track with your amortization schedule

Before you do, check your lender’s rules on prepayment privileges. Some mortgages allow you to increase payments by 10-20% annually or make lump sums without penalties.

2. Convert to a Fixed-Rate Mortgage

If you’re on a variable-rate mortgage, switching to a fixed-rate mortgage can offer some much-needed stability. Here’s why:

• Fixed monthly payments that fully cover both interest and principal
• No risk of future rate hikes affecting your balance

It might mean slightly higher payments today, but it can save you from growing debt tomorrow.
Alternative: If you prefer flexibility, consider switching to an adjustable-rate mortgage (ARM), which automatically adjusts payments to avoid falling into negative amortization.

3. Refinance Your Mortgage

Refinancing means replacing your current mortgage with a new one — ideally with better terms. This strategy helps you:

• Lock in a better rate
• Extend your amortization for lower monthly payments
• Consolidate debt and free up cash flow

Keep in mind that refinancing comes with fees and potential penalties, so run the numbers carefully.

4. Extend Your Amortization Term

Sometimes, just adjusting the terms of your mortgage can make a big difference. Ask your lender if you can extend your amortization from, say, 20 to 25 years. This can lower your payments enough to cover interest and get you out of the negative zone.
It won’t reduce your overall interest in the long run, but it can ease pressure in the short term while keeping your mortgage healthy.

5. Seek Expert Help

If you’re unsure what to do, this is where a mortgage broker or financial advisor becomes your secret weapon. They can:

• Review your mortgage terms
• Negotiate with lenders on your behalf
• Offer a custom strategy based on your income, risk, and goals

In some cases, they may even refer you to legal counsel if your lender is unwilling to modify your mortgage terms or if you’re approaching default.

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Frequently Asked Questions

Is negative amortization illegal in Canada?
No, but lenders are required to explain the risks clearly in your mortgage documents. It’s most common with VRMs during periods of rising interest rates.
Can my mortgage balance really grow over time?
Yes. If your monthly payments don’t cover the full interest amount, the unpaid interest gets added to your balance. That’s how negative amortization works.
What happens at mortgage renewal if I’m still over-amortized?
You may have to increase your payments, refinance, or pay a lump sum to bring your mortgage back in line with standard amortization. Your lender will typically not renew a negatively amortized mortgage without adjustments.

Final Thoughts

Negative amortization can feel scary, but it’s not a dead end. It’s a warning sign that your mortgage needs attention. The good news? You have options. From boosting your payments to switching to a fixed rate or refinancing altogether, taking action early can help you avoid long-term damage to your finances.
At Mortgage.Expert, we’re here to help Canadians make informed decisions about their mortgages. Whether you’re navigating variable rates or looking for a reset, our experts can help you find a plan that fits.