There is more than one type of adjustable/variable rate mortgage and it is important to know which type you have. If you have an Adjustable Rate Mortgage then as the prime rate has been changing, so have your payments, which keeps the amortization the same. With a Variable Rate Mortgage, the rate changes but your payment stays the same, which in turn extends the amortization. You may have been happy to find out you have a variable rate mortgage as prime rates moved up quickly and yet this can really affect you at renewal time. Let me explain.


The variable interest rate has increased by 4.5% in the past 18 months. To put that into perspective, with a 15 year amortization, this is an increase in payments of $762 per $100,000 in mortgage money to stay on track and not go backwards. For a 25 year amortization it is an increase in payment of $550 per $100,000 in mortgage payments. So if you have a $400,000 mortgage, you should be increasing your mortgage payment by a minimum of $2000 per month to avoid moving into a negative amortization situation (defined below).


Let’s suppose you have a variable rate mortgage with a $1200/month payment and 15 years remaining on your amortization. If the payments have remained the same you will likely be at around a 40 year amortization at this point. This is what is called negative amortization as your entire mortgage payment is going to interest and even that interest is not fully covered. This will become a “problem” when your mortgage is up for renewal. At renewal time a few things can happen.

1. You will need to make a massive lump sum payment to bring the balance back to the original amortization or

2. Your payment will increase to put your amortization back to 25 - 30 years.

3. You could be forced to remain at your current lender due to either of these situations, unable to negotiate the best mortgage rate for you.


How do you protect yourself?


Call your lender/bank and ask some key questions. I would ask:


  1. What is my current payment?
  2. What is my current rate?
  3. What is my current amortization?
  4. What is going to happen at my renewal if I don’t make any changes?
  5. What changes do I need to make to ensure I do not have a negative amortization upon renewal of my mortgage?


Once you have those answers you can make an informed next step decision, whether that is to increase your mortgage payments, keep them the same or make a lump sum prepayment. Knowledge is your power. Do not avoid this conversation. The sooner you know what is happening with your mortgage the sooner you can right the boat and get back on course. 


One thing I know after over 20 years in the mortgage financing industry is that lenders of money do not like to have mortgage defaults on their books. Arrears in mortgages are when payments are 90 days past due.  Arrears in Canada are still very low, however, for people who are already at the top of their payment budget and have a renewal coming up in the next 24 months there could be some serious challenges. 


As interest rates rise and fall, it is your responsibility to protect the largest financial asset you have. I am here for you if you have any questions about your mortgage and your home.