Rollover Mortgage

A rollover mortgage is a mortgage in which the unpaid balance, representing the outstanding principal, must be refinanced every few years at current interest rates, subject to certain limits. Typically, this refinancing process would occur every three to five years. Up until the renegotiation point, the interest rate would remain fixed. That initial fixed interest rate is usually lower than that of a standard fixed-rate mortgage. A rollover mortgage differs from a hybrid mortgage, though. With a hybrid mortgage, the interest rate also starts out as fixed, but then the loan changes at a pre-determined point to an adjustable-rate mortgage, with the rate changing every year from that point on for the remaining life of the loan.

The initial mortgage contract would spell out the specific terms and restrictions of the loan. For example, it may specify the mortgage interest rate may not increase by more than 0.5 percent per year or by more than 5 percent over the life of the loan. The life of a rollover mortgage is commonly 30 years.

A rollover mortgage is sometimes also called a renegotiable-rate mortgage. The purpose of a rollover mortgage is to reduce the mortgage lender's interest-rate risk by passing some of that risk on to the borrower. Variable-rate mortgages have a similar purpose.

Who benefits most from a rollover mortgage? That depends on interest rate trends at that given time. When interest rates are falling, this type of loan benefits the borrower, but when they are rising, it can harm the borrower and is more beneficial to the lender.

An example of a rollover mortgage is the Canadian rollover mortgage, which is a common type of renegotiable-rate mortgage in Canada. With a Canadian rollover mortgage, however, there are generally no limits as to how big of an adjustment the interest rate can have, which makes this type of loan more unpredictable.

Some people mistakenly assume a rollover mortgage means the balance or remaining principal can be rolled over, or included in, the starting balance of a completely new and separate loan. This would be similar to the practice of carrying over the remaining balance of an existing car loan into the financing for another vehicle when the old vehicle is traded in as part of the transaction. However, in real estate there is no such practice. Each property must be purchased and financed as its own separate and new transaction.