If you decide to not sell your place and need to continue with your ARM.... the following steps typically occur:
1) Depending if your bought down points or have a discounted rate, you may or may not have a step increase in your rate at the end of your 7 years.
2) Interest rates may increase, (Based on fed rate) but are unlikely to increase more than 0.5% in a year. 1% at the outside.
If based on the above 2 conditions, you determine that you can't afford your monthly payments:
A) Start shopping 3 months early to refinance your mortage. Another ARM is fine if you like.
B) Refinance can include the following options, if it increases:
--> Longer Amortization -- to lower monthly payments
--> Higher monthly payments
--> Put more money down to increase Loan to value.
Obviously there are some problems at this point, namely, if you no longer have income to cover the loan, or if your equity ratio falls into the mortgage insurance zone, or if you have to pay a lot of broker / mortgage fees up front.
The good news is that if you did not go aggressively on your mortgage financing in the first place, and have income, you should have no trouble refinancing after 7 years, as your increase equity tends to allow more flexible options for income and monthly payments.
Note that home prices rarely decline much. Usually prices stay with 5% of your purchase price for many years (flat), rather than fall 10% or more. So that 7 years of payments helps building in extra equity to buffer small drops.
As another poster stated, 5 year ARMS are the normal mode for Canadian housing, (as the banks carry their own paper, so want options to match GIC rates more often), and it has been quite rare for someone to "lose a home" during the 5 year refinancing period, especially if you put down 10% or more in the first place.
If rates increase a lot, then people just refinance another 25 year or 30 year loan, instead of dropping it by 5 years each time... or their income has increased to cover it ok.