Negative amortization is when your mortgage balance goes up instead of down even though you make every payment on time. It happens when the payment no longer covers the interest charged, and the unpaid interest is added to what you owe. Instead of building equity with each payment, you lose a little more of it each month, and the shortfall itself starts to earn interest.
It became a real issue in Canada in 2022 and 2023, when the Bank of Canada raised its policy rate from 0.25% in early 2022 to 5.00% by July 2023. In November 2022 the Bank estimated that about three-quarters of variable-rate mortgages had fixed payments, and that about 50% of those had already reached the rate at which the payment covers only interest. This guide is part of the mortgage types and features hub.
How negative amortization works
On a normal payment, part goes to interest and the rest reduces the principal:
Payment = interest + principal
When the payment is smaller than the interest owed, the shortfall is added to the balance instead:
Payment < interest owed → shortfall added to the principal
A $450,000 balance at a variable rate of 5.75%, with interest charged monthly and a fixed payment of $1,950:
The first month’s interest is $2,156, so $206 of interest goes unpaid and is added to the balance. The next month’s interest is charged on that larger balance, so the shortfall grows a little each month:
| After | Extra owed on the balance |
|---|---|
| 6 months | $1,252 |
| 12 months | $2,541 |
| 24 months | $5,233 |
| 36 months | $8,083 |
After a year of on-time payments totalling $23,400, none of it has reduced the principal, and the borrower owes more than at the start.
Why it happens: fixed-payment variable mortgages
Negative amortization is a feature of one kind of variable-rate mortgage. With an adjustable payment, the payment is recalculated whenever the rate changes, so it always covers the interest. With a fixed payment, only the split between interest and principal changes, so a big enough rise can push the interest above the payment. How the two kinds compare is covered in adjustable-rate vs variable-rate mortgages.
Lenders don’t all handle the limit the same way. As the Bank of Canada put it, some automatically increase the payment so it keeps covering the interest, while others allow negative amortization; some contact borrowers before they reach the limit and offer a switch to a fixed rate or a lump-sum payment. Your mortgage contract and disclosure say which approach your lender takes.
The trigger rate and the trigger point
On a variable-rate mortgage whose payment doesn't change with the rate, the trigger rate is the rate at which the payment only covers interest; a bank must state it in your disclosure. Once it's reached, the lender may require higher or extra payments or a switch to a fixed rate, or add the unpaid interest to your balance (negative amortization). The trigger point is a separate limit on how far the balance can grow: reach it and you must adjust your payments, prepay or pay off the balance.How far rates have to rise depends on your original rate and amortization. In the Bank of Canada’s example, a mortgage that started with a 30-year amortization at 1.5% would reach its trigger rate at 4.2%. Mortgages signed at very low rates, often with long amortizations, reach theirs soonest.
How the trigger rate is calculated and disclosed is in the trigger rate explained, and what you can do once the balance reaches the lender’s limit is in trigger point options.
Five ways out of negative amortization
1. Increase your regular payment
Most closed mortgages let you raise your payment by a set percentage each year without a penalty; how much depends on your prepayment privileges. The new payment needs to be higher than the monthly interest charge.
In the example above, raising the $1,950 payment by 20% adds $390, for a new payment of $2,340. That covers the $2,156 of interest with $184 left to reduce the principal.
2. Make a lump-sum payment
A lump sum within your annual prepayment limit lowers the balance, which lowers the monthly interest, which makes it easier for the fixed payment to cover it again.
At 5.75%, each lump sum cuts the interest charged in a year by about:
| Lump sum | Interest saved in a year |
|---|---|
| $10,000 | $575 |
| $25,000 | $1,438 |
| $50,000 | $2,875 |
3. Switch to a fixed rate
If your variable-rate mortgage has a convertibility feature, you can change it to a fixed rate during the term, but you usually pay a fee, other conditions may apply, and the new fixed rate may be higher than the variable rate you've been paying. Whether a conversion is worth it, and how it compares with breaking the mortgage, is covered in convertible mortgages. Locking in also gives up the benefit if rates fall soon after.
4. Break and refinance
Breaking the mortgage and starting a new one gives you a new rate and a payment that covers the interest, at the cost of a penalty (usually three months’ interest on a variable rate) plus legal and discharge costs. It tends to make sense when your lender’s conversion rate is uncompetitive; how mortgage penalties are calculated explains the cost.
5. Wait for rates to fall
If rates come down, your fixed payment will again cover the interest and then start reducing the principal. The risk is that the balance keeps growing while you wait, and rates may not fall as quickly as expected.
On the $450,000 balance with the $1,950 payment:
| Rate falls to | Monthly interest | Payment vs interest |
|---|---|---|
| 5.25% | $1,969 | Still $19 a month short |
| 4.75% | $1,781 | Covered, with $169 going to principal |
| 4.25% | $1,594 | Covered, with $356 going to principal |
If you’re falling behind
If you're at risk of mortgage default and working with your lender on a solution, a federally regulated lender such as a bank is expected to offer relief suited to your circumstances: for example a payment deferral (usually up to 4 months), waived prepayment penalties on a lump-sum payment that avoids negative amortization or when you sell your home, waived internal fees and no interest on interest for a limited period, or a longer amortization with a plan to restore it. Relief can raise what the mortgage costs in total. The options are covered in mortgage payment deferral.
How to tell if your balance is growing
Check your statement. If the principal owing is higher than it was a year ago, or higher than the amount you borrowed, the mortgage is negatively amortizing. How to read a mortgage statement shows where to look.
Ask your lender whether your payment covers the full interest, what your effective amortization is now, and whether you’ve reached your trigger rate.
Do the sum. A rough monthly interest charge is the balance times the annual rate, divided by 12. If that is more than your payment, the balance is growing.
What happens if it continues
| Consequence | Effect |
|---|---|
| A longer effective amortization | The time to repay at the current payment can stretch far past the original amortization |
| A higher balance at renewal | You may owe more at renewal than when the term began, and the lender will reset the payment |
| Reaching the trigger point | The lender requires a higher payment, a prepayment or a payoff |
| Less equity | If home values fall at the same time, you could owe more than the home is worth |
| More interest overall | Unpaid interest earns interest until it’s repaid |
Why a payment rises at renewal after a period like this is covered in why your mortgage payment is going up, and the renewal itself in the mortgage renewal guide.
Sources
The figures and rules on this page come from these sources, last checked against them between September 29, 2026 and October 2, 2026. How we check facts.
- Bank of Canada: Variable-rate mortgages with fixed payments: Examining trigger rates
- Financial Consumer Agency of Canada: House Standing Committee on Finance (February 13, 2024) ISSUE: Variable rate mortgages…
- Financial Consumer Agency of Canada: Paying your mortgage when experiencing financial difficulties
- Financial Consumer Agency of Canada: Interest on mortgages
- Financial Consumer Agency of Canada: Mortgage relief options
- Justice Laws (Canada): Financial Consumer Protection Framework Regulations
- RBC: Variable Rate Mortgage | RBC Royal Bank of Canada