Definition§
A Rollover Loan is a type of mortgage often used in Canada where the loan’s principal is amortized over a long-term period, but the interest rate is only fixed for a shorter term. At the end of this shorter term, the interest rate is adjusted to reflect current market rates, and the loan may be extended or “rolled over” for another short-term period.
Examples§
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Example 1: Jane obtains a rollover loan with a 25-year amortization, but her interest rate is fixed for only 5 years. After 5 years, the current market interest rate is applied to the remaining principal.
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Example 2: John takes a rollover loan with a 30-year amortization period. Initially, he gets a fixed interest rate for 7 years. Once this period ends, he renews the loan with an updated interest rate reflective of market conditions at that time.
Frequently Asked Questions (FAQs)§
1. Why would someone choose a rollover loan?
A: Borrowers might choose a rollover loan to initially benefit from lower interest rates and then renegotiate rates based on market trends at periodic intervals.
2. Are rollover loans riskier than fixed-rate mortgages?
A: Yes, they can be riskier since the future interest rates are uncertain, which might lead to higher costs if market rates increase.
3. Can rollover loans be converted to fixed-rate mortgages?
A: It depends on the lender’s policies. Some lenders may offer an option to convert rollover loans to fixed-rate mortgages, often during a rate reset period.
4. How does the amortization period affect the monthly payments?
A: A longer amortization period generally lowers the monthly payments since the principal repayment is spread over a more extended period, despite changing interest rates.
Related Terms§
Mortgage: A loan used to purchase real estate, typically involving repayment with interest over a predefined term.
Amortization: The process of spreading out a loan into a series of fixed payments over time.
Interest Rate: The percentage charged on a loan or earned on an investment for the service of lending or investing money.
Fixed-Rate Mortgage: A mortgage where the interest rate remains constant throughout the loan term.
Online Resources§
- Investopedia: Mortgage Definition
- Canada Mortgage and Housing Corporation (CMHC) - Types of Mortgages
- Government of Canada - Amortization Periods and Mortgage Terms
Suggested Books for Further Studies§
- “Canadian Home Financing: A Practical Guide for Homebuyers and Investors” by Peter Millar
- “Mortgage Management for Dummies - Canada” by Eric Tyson and Robert S. Griswold
- “The Canadian in America: Real Estate 101 in the U.S.A.” by Brian D. Wruk
Fundamentals of Rollover Loans: Mortgage Basics Quiz§
Thank you for learning about Rollover Loans! Stay informed and remember to review your loan options carefully to find the best fit for your needs.