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Negative amortization happens when a mortgage payment no longer covers the full interest owed for the period, so the unpaid interest is added to the principal balance — meaning the amount owed grows instead of shrinks, even though payments continue on schedule.
This most commonly happens with static-payment variable-rate mortgages once the interest rate has risen past the mortgage’s trigger rate: the fixed payment amount is no longer enough to cover even 100% of the interest owed, so the shortfall capitalizes onto the outstanding balance.
Left unaddressed past that point, the loan doesn’t just stall — the effective remaining amortization actually lengthens, the opposite of the normal payoff trajectory. This is why lenders monitor for accounts nearing their trigger point and intervene before the shortfall grows further.
Rate-driven, not missed payments: negative amortization on a variable mortgage stems from a rising rate outpacing a fixed payment amount, not from a borrower failing to pay — see trigger rate.
OSFI oversight: this dynamic prompted OSFI guidance requiring federally regulated lenders to actively monitor and manage variable-rate borrowers approaching or past their trigger point.
Lender action is typically required: Canadian lenders generally intervene once negative amortization is identified — through a payment increase, a lump-sum request, or a conversion to fixed — per the mortgage contract's terms.
Fixed-rate mortgages aren't exposed: because the rate is locked for the term, a fixed-rate mortgage does not experience this dynamic.
Definitions reflect Canadian federal and provincial rules as of the “Updated” date above. Not advice for any specific file.
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