Rollover Loan
Definition
A Rollover Loan is a specific type of mortgage loan commonly used in Canada, in which the amortization period for the principal is set for a long term, such as 30 years, but the interest rate is fixed only for a much shorter term, such as 1, 2, or 5 years. At the end of the shorter term, the interest rate may be renegotiated to reflect the current market rates, in a process referred to as “rolling over” the loan.
Examples
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Abel’s Mortgage:
Abel obtains a rollover loan with a 30-year amortization period. The initial interest rate is 9% fixed for two years. After the two-year period, the current market interest rate applies, and Abel must either accept the new interest rate, refinance the loan, or seek another mortgage solution.
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Emily’s Home Purchase:
Emily buys a house using a rollover loan with a 5-year term for the interest rate and a 25-year total amortization period. At the end of the 5 years, Emily renegotiates her mortgage to take advantage of potentially lower interest rates available at that time.
Frequently Asked Questions
What happens when the interest rate term ends on a rollover loan?
At the end of the shorter interest rate term, the borrower must either roll over the loan at the current market interest rate or refinance the loan with a different lender or mortgage product.
How is a rollover loan different from a fixed-rate mortgage?
A fixed-rate mortgage locks in the interest rate for the entire loan term, while a rollover loan fixes the interest rate only for a shorter term, with the potential for interest rate adjustments at predetermined intervals.
Can a borrower choose not to roll over the loan?
Yes, the borrower can opt to refinance the mortgage with a different product or lender instead of rolling it over at the end of the interest rate term.
Do rollover loans typically have lower initial interest rates compared to fixed-rate mortgages?
Yes, rollover loans often have lower initial interest rates compared to fixed-rate mortgages because the lender is taking on less long-term interest rate risk.
- Amortization: The process of repaying a loan through regular payments over a set period.
- Refinancing: Replacing an existing loan with a new loan that typically has different terms.
- Principal: The original sum of money borrowed in a loan or the remaining balance of a loan, excluding interest.
- Interest Rate: The percentage of the loan amount charged by the lender for borrowing the funds.
Online Resources
References
- Canadian Real Estate Association. “Mortgage Information.” CREA, 2023.
- CMHC, “Understanding Your Mortgage,” Canadian Mortgage and Housing Corporation, 2023.
Suggested Books for Further Studies
- “The Complete Guide to Canadian Mortgage Financing: Helping You Get the Best Deal” by Vince Gaetano
- “Mortgage Confidential: What You Need to Know That Your Lender Won’t Tell You” by David Reed
- “Your Canadian Financial Planning Cookbook: A Master’s Recipe for Your Finances” by Gerald Todd Italy
Real Estate Basics: Rollover Loan Fundamentals Quiz
### What is a key feature of a rollover loan?
- [ ] It has a fixed interest rate for the entire loan term.
- [x] It has a short-term fixed interest rate with a longer amortization period.
- [ ] It does not require amortization payments.
- [ ] The interest rate never changes.
> **Explanation:** A rollover loan is characterized by having a short-term fixed interest rate that is renegotiated periodically, while the principal amortization term can be much longer.
### What happens if the borrower chooses not to roll over the loan at the end of the interest term?
- [ ] The loan is automatically paid off.
- [ ] The interest rate remains the same.
- [x] The borrower must find alternative financing or refinance.
- [ ] The property is foreclosed.
> **Explanation:** If the borrower decides not to roll over the loan, they must either refinance with a new loan or find alternative financing.
### What is usually shorter in a rollover loan compared to traditional fixed-rate mortgages?
- [x] The interest rate term
- [ ] The principal amount
- [ ] The amortization period
- [ ] The balloon payment
> **Explanation:** The interest rate term is shorter in a rollover loan compared to fixed-rate mortgages, where the rate is fixed for the entire term.
### In which country are rollover loans commonly used?
- [ ] United States
- [ ] United Kingdom
- [x] Canada
- [ ] Australia
> **Explanation:** Rollover loans are commonly used in Canada as a mortgage product.
### Which term refers to the total time over which the principal of a loan is repaid?
- [ ] The interest rate term
- [ ] The refinancing period
- [x] The amortization period
- [ ] The fixed rate period
> **Explanation:** The amortization period is the total time over which the loan principal is repaid through regular payments.
### How can a borrower take advantage of potentially lowering interest rates with a rollover loan?
- [ ] By paying off the loan early
- [x] By renegotiating the interest rate at the end of each term
- [ ] By switching to an interest-only payment plan
- [ ] By locking in the original rate for the entire amortization period
> **Explanation:** At the end of each interest rate term, the borrower can potentially take advantage of lower interest rates by renegotiating the rate.
### What must a borrower often do at the end of the initial fixed interest rate term in a rollover loan?
- [ ] Move to a new home
- [ ] Seek default
- [x] Re-negotiate the loan interest rate
- [ ] Pay the loan in full
> **Explanation:** The borrower typically needs to renegotiate the loan interest rate at the end of the initial fixed interest rate term.
### Which of the following is an advantage of a rollover loan?
- [x] Lower initial interest rates
- [ ] No need for refinancing
- [ ] Fixed interest rate until loan maturity
- [ ] Shorter amortization period
> **Explanation:** Lower initial interest rates are an advantage of a rollover loan due to the lenders taking on less long-term rate risk.
### What is not a characteristic of a rollover loan?
- [ ] Re-negotiable interest rates
- [ ] Long amortization period
- [ ] Potentially lower initial interest rates
- [x] Fixed interest rates for the entire amortization period
> **Explanation:** Fixed interest rates for the entire amortization period are not characteristic of a rollover loan; the rates are fixed for shorter periods and renegotiated.
### When might a borrower choose to refinance a rollover loan?
- [ ] When the property value declines
- [ ] At the start of the loan term
- [x] At the end of the interest rate term
- [ ] When switching to a rental property
> **Explanation:** Borrowers often choose to refinance a rollover loan at the end of the interest rate term to potentially secure better terms or rates.
