Canadian Rollover Mortgage
What is a Canadian Rollover Mortgage?
A Canadian rollover mortgage is an adjustable-rate.
How Does a Canadian Rollover Mortgage Work?
The interest rate on the loan may correspond to a specific benchmark (the prime rate, or sometimes LIBOR, the one-year constant-maturity Treasury, or other benchmarks) plus an additional spread (which is also called the , and its size is often based on the borrower's credit score). The benchmark plus the spread equals the interest rate on the loan.
To understand how Canadian rollover mortgages affect a borrower's payment, let's assume that a bank offers a $100,000 mortgage to a potential borrower. The interest rate is plus 5% with a cap of 10%. If the prime rate is 3%, then the borrower's interest rate is 8% (5% + 3%), and the monthly payment is $733.77. If the prime rate increases to, say, 4%, then the loan's interest rate goes to 9% (5% + 4%), and the payment goes to $804.63.
In many cases, Canadian rollover mortgages have no caps -- no limits on how high and sometimes how low the interest rate can go, and how much they can move in any one , month or quarter. That's because in many cases, the and the borrower renegotiate the loan rate every few years.
Why Does a Canadian Rollover Mortgage Matter?
The idea behind Canadian rollover mortgages is to accept the risk (and the corresponding potential reward) that rates will fall accordingly; the lender, on the other hand, is hoping that interest rates will increase, which raises the amount of the loan generates (by increasing the borrower's payments).
As you can see, adjustable-rate mortgages can have complex implications. Thus, as is the case with any or other loan, borrowers must be sure to read and understand the lender's documentation and contemplate the implications of changes in interest rates. Borrowers should be sure they can handle the worst-case scenario of being forced to make higher payments.