Chart 48 Example of a Negative Amortization Payment Option
Example 1 for First Year: Interestonly or full principal and interest amortized over 30 or 15 years
First Year
Interestonly payment: 
Original loan balance 
$400,000 
Fullyindexed rate 
5.63% 
Interestonly payment (for 2nd month) (Note: This payment amount is for
the second month; the amount will change each month, depending on the movement
of LIBOR.) 
$1,875 
Full P&I payment (30 years)  Payment (for 2nd month) 
$2,303 
Full P&I payment (15 years)  Payment (for 2nd month) 
$3,295 
Example 2 for First Year: Minimum monthly payment (negative amortization) 

Original loan balance 
$400,000 
Fully indexed rate 
Libor + 2.5% 
Teaser rate 
1.50% 
Balance cap 
115% 
Minimum payment per month (for 1st year) (note: This payment amount is
for the first year.) 
$1,380 
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 interestonly 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.
Second Year
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.
