Chart 48 Example of a Negative Amortization Payment Option
Example 1 for First Year: Interest-only or full principal and interest amortized over 30 or 15 years
| Original loan balance
| Fully-indexed rate
|Interest-only payment (for 2nd month) (Note: This payment amount is for
the second month; the amount will change each month, depending on the movement
|Full P&I payment (30 years) - Payment (for 2nd month)
|Full P&I payment (15 years) - Payment (for 2nd month)
|Example 2 for First Year: Minimum monthly payment (negative amortization)
|Original loan balance
|Fully indexed rate
||Libor + 2.5%
|Minimum payment per month (for 1st year) (note: This payment amount is
for the first year.)
Note for First Year: If the borrower chooses the minimum monthly payment option: Negative amortization for the 2nd month is $495, which is the difference between interest-only payment of $1,875 and the minimum monthly payment of $1,380. For each month, the resulting amortization (which can change monthly) is added back to the loan balance; hence, the loan balance continues to grow even larger.
During the second year, a number of payment changes can happen, including: (1) The minimum payment can be raised up to the maximum amount (usually 7.5%); (2) The loan continues to accrue interest at fully indexed rate; and (3) When the level of negative amortization has pushed the loan balance up to the 115% of the original loan balance ($460,000), then the bank will begin to require higher minimum payments in order to get rid of the negative amortization.
Sources: HSH Associates and CIBC World Markets.