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The Negative Amortization Trap | Your Mortgage Minute · Your Mortgage Minute | Onlendhub

• 0:15
  SPEAKER_00: Welcome to your mortgage minute.
• 0:16
  SPEAKER_00: If you locked in a variable rate mortgage with fixed payments back in 2020 or 2021, there is a real chance your balance is now higher than when you started, even though you have been making every payment on time.
• 0:29
  SPEAKER_00: Today we are unpacking negative amortization, trigger rates, and what to do before your renewal hits.
• 0:36
  SPEAKER_00: We have our mortgage expert Moli here.
• 0:38
  SPEAKER_00: Mooley start with the mechanics.
• 0:41
  SPEAKER_00: How does a mortgage balance actually grow when you are making regular payments?
• 0:45
  SPEAKER_01: It comes down to the relationship between your contract rate, your payment, and how the lender applies interest.
• 0:52
  SPEAKER_01: When you signed up, your payment was calculated at a lower rate, often around 1.5 to 2%.
• 0:59
  SPEAKER_01: As the prime rate climbed, your contract rate moved up, but your payment stayed fixed.
• 1:04
  SPEAKER_01: Once your contract rate exceeded the rate embedded in your payment, the payment no longer covered all the interest.
• 1:10
  SPEAKER_01: The unpaid interest gets added to the principal.
• 1:12
  SPEAKER_01: That is negative amortization.
• 1:14
  SPEAKER_01: Here is a concrete example.
• 1:16
  SPEAKER_01: Say you borrowed$600,000 at a variable rate with a fixed monthly payment of$2,200 based on an initial rate of 1.8%.
• 1:24
  SPEAKER_01: At that rate, your interest portion was about$900 and the rest reduced principal.
• 1:30
  SPEAKER_01: As rates rose to around 5%, your monthly interest alone is roughly$2,500.
• 1:35
  SPEAKER_01: Your$2,200 payment now falls short by about$300.
• 1:40
  SPEAKER_01: That$300 is capitalized and your balance grows by roughly$3,600 per year, even with perfect payments.
• 1:47
  SPEAKER_00: Walk us through a second scenario with a higher balance and a different rate path and show how the trigger rate fits in.
• 1:54
  SPEAKER_00: Many listeners have heard the term but do not know how it actually works.
• 1:59
  SPEAKER_01: The trigger rate is the point where your fixed payment no longer covers the interest due and the lender must intervene.
• 2:05
  SPEAKER_01: Most lenders set this as a percentage of the original balance, often around 10 to 15% growth, or when the payment is fully interest only.
• 2:14
  SPEAKER_01: Take a$750,000 mortgage, originally at 2%, with a fixed payment of$3,000.
• 2:22
  SPEAKER_01: At 2%, monthly interest is about$1,250.
• 2:28
  SPEAKER_01: So most of your payment reduces principal.
• 2:30
  SPEAKER_01: If your contract rate climbs to 6%, monthly interest is roughly$3,750.
• 2:37
  SPEAKER_01: Your$3,000 payment is now short by$750 per month.
• 2:42
  SPEAKER_01: Over 12 months, that adds$9,000 to your balance.
• 2:47
  SPEAKER_01: On a$750,000 loan, a 10% trigger is around$82,500 of additional principal.
• 2:54
  SPEAKER_01: At a$9,000 per year growth rate, you hit that trigger in just over nine years if nothing changes.
• 2:59
  SPEAKER_01: In practice, many lenders act sooner, especially if your payment becomes fully interest only or if your amortization extends beyond the original term.
• 3:07
  SPEAKER_00: Give us one more example focused on renewal impact.
• 3:10
  SPEAKER_00: A borrower is coming up for renewal in the next six months.
• 3:13
  SPEAKER_00: Their balance has grown, and they are staring at a higher rate.
• 3:16
  SPEAKER_00: What does that math look like?
• 3:18
  SPEAKER_01: Consider a borrower with an original balance of$500,000, now at$520,000 due to negative amortization.
• 3:26
  SPEAKER_01: They were paying$2,000 per month at a variable rate around 3%.
• 3:30
  SPEAKER_01: At renewal, the lender offers 5.2% fixed for five years.
• 3:35
  SPEAKER_01: At 5.2% on$520,000 over 25 years, the new payment is about$3,100 per month.
• 3:43
  SPEAKER_01: That is an increase of roughly$1,100 per month compared to their original payment, and about$800 more than if their balance had stayed at$500,000.
• 3:54
  SPEAKER_01: Over the first year of the new term, they will pay about$13,200 more in total payments than they would have without negative amortization.
• 4:04
  SPEAKER_00: What decision framework should listeners use right now if they suspect they are in negative amortization?
• 4:10
  SPEAKER_01: Use this two-step framework.
• 4:12
  SPEAKER_01: First, quantify your position.
• 4:14
  SPEAKER_01: Ask your lender for three numbers your current balance, your original balance, and your contract rate.
• 4:20
  SPEAKER_01: Then request a projection of your balance at renewal if you do nothing.
• 4:24
  SPEAKER_01: Second, compare your options.
• 4:26
  SPEAKER_01: Option one is to reset your payment now to fully cover interest and start reducing principal again.
• 4:32
  SPEAKER_01: This increases monthly cash outflow but stops the balance from growing.
• 4:36
  SPEAKER_01: Option two is to refinance into a fixed rate product before renewal, locking in a known payment and amortization, even if the rate is higher than today's variable rate.
• 4:47
  SPEAKER_01: Option three is to switch lenders at renewal, but be prepared for a larger balance and a higher qualifying rate under the stress test.
• 4:55
  SPEAKER_01: The red flag here is waiting until renewal to act.
• 4:58
  SPEAKER_01: By then, your balance is higher, your qualifying rate is higher, and your options are narrower.
• 5:04
  SPEAKER_00: Summarize the key takeaways for someone listening on their commute.
• 5:08
  SPEAKER_01: One, negative amortization means your balance is growing despite making payments because your fixed payment no longer covers all the interest.
• 5:15
  SPEAKER_01: Two, trigger rates force lender intervention.
• 5:18
  SPEAKER_01: But waiting for that point means you have already lost ground.
• 5:21
  SPEAKER_01: Three, the best move is to model your renewal now, compare reset versus refinance versus switch, and act before the renewal letter arrives.
• 5:29
  SPEAKER_00: Key points to remember negative amortization can quietly increase your mortgage balance.
• 5:34
  SPEAKER_00: Trigger rates are a warning sign, not a starting point for action.
• 5:38
  SPEAKER_00: And the right move is to run the numbers now, not at renewal.
• 5:43
  SPEAKER_00: That is all for today.
• 5:44
  SPEAKER_00: You have been listening to your mortgage minute by onlendhub.ca.
• 5:49
  SPEAKER_00: See you again in another episode.