Canadian Rollover Mortgage

A Canadian rollover mortgage is a home mortgage with an adjustable rate feature. The Canadian Rollover mortgage differs from a 30-year fixed rate mortgage, in that the loan's interest rate is adjusted every five years, with no cap on the interest rate adjustment. The Canadian Rollover Mortgage is also known as a Variable Rate Mortgage or a Renegotiable Rate Mortgage.

The Canadian Rollover Mortgage is called such as it is the standard mortgage in Canada. Adjustable Rate Mortgages, or ARM's, in the U.S. are usually linked to an index such as the Consumer Price Index, or CPI, and adjust every year after a lock-out period, which is usually 3, 5, or 7 years. The rate on the Canadian Rollover Mortgage is actually renegotiated, typically once every five years. Because it’s renegotiated so often, there is no specific cap on either the interest minimum or maximum at the set time of the interest rate change. The variable interest rate can be of benefit or considerable disadvantage to the consumer based on how high or low the rate falls or rises.

Canadian Rollover Mortgages are also considered a kind of rollover mortgage. Other mortgages that belong to this group are the aforementioned ARM, the variable rate mortgage, and the renegotiable rate mortgage. All of these mortgages were developed, in part, to allow a larger group of borrowers to participate in the housing market. When real estate gets too expensive for borrowers (either due to price appreciation or high interest rates) mortgage providers get creative with mortgage structures to entice people to borrow. A rollover mortgage works by having the borrower elect to re-lock into the mortgage every time the interest rate is renegotiated. If the borrower agrees to accept the new interest terms of the loan, the loan is rolled-over to the next term, which is generally another give years. If the borrower does not accept the loan terms, the loan must be paid back in full or the borrower has to seek alternative funding from a different source.

An as an example of how a Canadian rollover mortgage might work, consider a home owner who applies for a $200,000 home mortgage. The initial interest rate on the mortgage is set to 8% for five years. At the end of the five years, the mortgage is re-presented with an interest rate of 10% and the borrower can elect to rollover the mortgage into the new terms or choose a different lender.