Navigation skipped

Understanding negative amortization

When interest rates rise, homeowners with variable rate mortgages may face negative amortization, which can put financial goals at risk. Find out more about how negative amortization works and what you can do to get out of it.

Here’s what you’ll need to know

  • What is negative amortization?

What is negative amortization?

Negative amortization happens when your monthly mortgage or installment payments are no longer enough to cover the cost of the interest. The unpaid interest is added to your mortgage balance, increasing rather than decreasing, the amount you owe.

How am I impacted by negative amortization?

With a BMO variable rate mortgage or Homeowner ReadiLine® your payments remain unchanged. As rates rise, more of your payment goes into interest instead of the principal. Negative amortization means that your payments don’t cover your interest.
This can directly affect your mortgage in two ways:
  • Your mortgage balance will continue to increase with each installment payment instead of decreasing. As a result, your amortization period will increase, taking longer to pay off your mortgage balance.
  • Your installment payments at renewal will increase substantially, which can impact your financial goals.

What this looks like during mortgage renewal

Let’s say that you have a $400,000 variable rate mortgage with BMO that’s currently in negative amortization with the outstanding balance of $398,000.footnote star It has a $1,550 monthly payment and will be up for renewal in three years.
Since the monthly payment isn’t enough to cover interest, your mortgage balance increases with each payment. The bar graph shows that if you stick to $1,550 monthly payments, your mortgage balance at renewal will be $411,000, which is higher than your today’s balance of $398,000 and your initial mortgage amount of $400,000.
Higher balance at renewal will lead to higher payments, so increasing mortgage payments now will help to mitigate that.

footnote star detailsFor illustrative purposes only. The chart assumes variable rate of 1.25% at origination in November 2021. 

The mortgage balance will increase by $13,000 over three years instead of decreasing from its current amount and $11,000 more than original.
When the rate decreases by 1.25%, the balance at renewal will decrease by $2,000 from its original amount three years prior.

The impact of rate decreases on a mortgage in negative amortization

Let’s review what happens to a mortgage in negative amortization when rates immediately decrease. footnote star To illustrate, we’ll use our example of the $400,000 variable rate mortgage1 with BMO.
To get out of negative amortization, the Bank of Canada would have to immediately decrease the rate by 1.25%. The bar graph shows that the mortgage balance at renewal will be $398,000, which is only $2,000 less than the initial mortgage amount. This means that it’ll take longer to pay off the mortgage than originally planned and at renewal, you may face higher monthly payments.

footnote star detailsFor illustrative purposes only.

How to get out of negative amortization

Concerned about negative amortization? Whether you have a variable rate Homeowner ReadiLine® or mortgage, we’re here to help. Here are some actions you can take today to get back to making real financial progress.
  • Increase my mortgage installment payments footnote star†
    Reduce the gap between your payment and owed interest by making larger mortgage installment payment amounts. This is the simplest option to get out of negative amortization.
  • Make a lump-sum payment footnote star††
    Reduce your overall mortgage balance with a one-time or recurring payment.
  • Make a lump-sum payment and increase my overall payments
    Cover your interest charges by increasing your overall payments and bring down your mortgage balance with a one-time or recurring payment.
  • Convert to a fixed rate mortgage
    Lock in a fixed interest rate and enjoy stability in consistent, monthly payments so you can focus on making real financial progress.
BOOK AN APPOINTMENT

footnote star details Got a variable rate mortgage? Follow along with our demo to learn how you can make extra mortgage payments, or sign in to BMO Online Banking to get started.

F A Qs

  • Here are some ways you can keep on top of your payments and avoid negative amortization:
    1. Make sufficient payments: Ensure that your monthly payments cover both interest and principal.
    2. Choose the right mortgage for you: If you think that a variable rate mortgage in negative amortization will have a large impact on your finances, consider opting for a fixed rate mortgage.
    3. Review your mortgage terms regularly: Periodically review your mortgage terms and payment schedule to ensure you’re on track to pay off your mortgage within your amortization period.
    4. Consult a Mortgage Expert: Seek advice from one of our Mortgage Experts who can guide you on mortgage options that align with your financial goals.

  • There isn’t a specific limit to negative amortization set by provincial or federal laws in Canada. However, mortgage regulations can change over time and vary by province or territory. Reviewing the terms of your mortgage agreement and consulting with a mortgage advisor before you sign will keep you prepared and up-to-date with current regulations.

  • Bringing your mortgage balance out of negative amortization is important. If left unaddressed, then your balance could keep growing instead of shrinking with each payment. This will prolong your amortization (the time it takes to pay off the mortgage) and cause payments at renewal to rise, which may impact your goals.

    Note: We may raise payments to cover interest if your BMO variable rate mortgage or Homeowner ReadiLine® stays in negative amortization. We’ll let you know your new payment amount beforehand. You can check your loan agreement for more information.

  • No, it doesn’t. Fixed rate mortgages remain the same throughout the term of your loan and are calculated to ensure that both the interest and principal are fully paid off by the end of the term.

  • Yes. If your variable rate mortgage or Homeowner ReadiLine® stays in negative amortization and you haven’t taken action, we may increase your payments to cover interest. We’ll notify you beforehand and provide details on the new amount. You can refer to your loan agreement for more information.

  • This will depend on your mortgage situation. The Bank of Canada would need to cut interest rates enough so your payments cover interest charges.

  • You can prepay your mortgage online by signing in to BMO Online Banking. Follow along with our demo to learn how you can quickly and conveniently make extra mortgage payments online.

Our tips and resources for you

    What is amortization?

    Learn everything you need to know about mortgage amortization and how it can help you better understand your mortgage.

    Understanding the impact of changing interest rates

    Learn how to navigate interest rate changes and what they mean for your mortgage.

    Mortgage calculators

    Explore all your mortgage options from monthly payments to affordability and much more with our helpful calculators.

    Let's connect

    • Visit us

      Book an appointment at your nearest branch to chat about your mortgage options.

    • Sign in to Online Banking

      Get all your banking done anytime, anywhere with Digital Banking.

      Sign in
    • Footnote dagger details For variable rate mortgages, you can increase your mortgage payment to cure negative amortization without penalty. Other products terms vary, please consult our Mortgage Experts to discuss.
    • Footnote dagger dagger detailsFor variable rate mortgages you can make lump-sum prepayments (minimum of $100) each year without a prepayment charge. The maximum of all prepayments per calendar year is 20% of the original mortgage amount. You can make any lump sum payment amount at renewal without a prepayment charge. Other product terms vary, please consult our Mortgage Experts to discuss.
    • Footnote 1 details For illustrative purposes only. This graph is an example to demonstrate an impact of an immediate 1.25% Bank of Canada rate decrease (as of June 1, 2024) on a variable rate mortgage that is in negative amortization. At origination, the mortgage balance was $400,000, with a 25-year amortization, and a mortgage variable rate of 1.25%.