Definition
Negative amortization occurs when a mortgage payment is insufficient to cover accrued interest, causing the shortfall to be added to the principal balance. In plain terms: instead of repaying the loan, you are increasing it.
This phenomenon emerged in the 2022–2023 rate hike context for variable-rate mortgages with **fixed payments**: payments were calibrated at subscription with low rates, but as rates rose, an increasing share of the fixed payment went to interest — until interest exceeded the payment. Some lenders (including certain Canadian banks) sometimes allowed the balance to temporarily increase rather than immediately imposing a payment increase.
Unlike variable-rate mortgages with **variable payments** (which automatically adjust the monthly amount to preserve amortization), fixed-payment variable loans expose borrowers to negative amortization. Since OSFI 2023–2024 rules, lenders must cap allowable residual amortization before imposing a forced correction.