Dealing With Negative Amortization

A growing number of Metro Vancouver and Fraser Valley area homeowners, especially recent ones, are facing negative amortization challenges. Sadly, this is a stressful situation for too many people right now, from Vancouver to Abbotsford. Below is a quick overview of the challenges this creates and what some solutions might be.

What is negative amortization?

Negative amortization occurs when the monthly payments on a mortgage loan are not sufficient to cover the interest charges, resulting in the unpaid interest being added to the principal balance of the loan. This causes the mortgage loan balance to increase over time, instead of decreasing, as it should with regular amortization.

To understand negative amortization, let's consider an example. Suppose you have a mortgage with a monthly payment of $1,000, but the interest charges for that month amount to $1,200. In this case, the $200 shortfall is added to the mortgage loan balance, causing it to increase. This situation can arise with certain types of loans, such as variable-rate mortgages (VRMs) with initial teaser rates or interest-only loans.

Negative amortization can create several challenges for borrowers, including:

1) Growing loan balance: As the loan balance increases, it can become difficult to repay the debt and build equity in the property.

2) Increased interest costs: With a higher loan balance, more interest accrues over time, leading to higher overall interest costs throughout the life of the loan.

3) Potential financial strain: If the loan balance grows significantly, it may become unmanageable for borrowers, especially if their income doesn't keep pace with the rising debt. It may also become impossible to keep up with rising monthly mortgage payments.

To cope with negative amortization, here are a few strategies you can consider:

1) Refinance the loan: If you have a loan with negative amortization, you may explore refinancing options to convert it into a more traditional mortgage with fixed payments that cover both principal and interest. This can help stop the growth of the loan balance and bring it back on track for repayment.

2) Make larger payments: If your financial situation allows, consider making larger monthly payments to cover the interest shortfall and reduce the loan balance. This will help prevent further negative amortization and gradually bring the loan back to regular amortization.

3) Sell the property or downsize: If the negative amortization becomes unmanageable or the property's value has significantly declined, you may consider selling the property to repay the loan. Alternatively, downsizing to a more affordable property can help alleviate the financial burden.

4) Seek assistance from a professional: Consult with a financial advisor or a real estate agent like me to get guidance tailored to your specific situation. They can help you evaluate your options and develop a strategy to cope with negative amortization.

FINAL THOUGHTS

Remember, the best course of action depends on your individual circumstances, the terms of your loan, and the overall real estate market conditions. It's crucial to assess your financial situation and consider seeking professional advice to determine the most appropriate steps to take.

If selling your Metro Vancouver or Fraser Valley area house, townhouse or condo makes the most sense, I would be happy to discuss your options and provide a FREE comparative market evaluation to get you a current valuation for your home. I serve markets that include Surrey, Langley, Abbotsford, Mission, Burnaby, Vancouver, Delta and Coquitlam.