Convertible mortgage

Just as portability makes the long-term mortgage viable, "convertibility" makes the short-term mortgage viable. A convertible mortgage allows borrowers to "lock-in" to a long-term fixed-rate mortgage whenever they want before maturity.

Deciding whether to book a long-term or short-term mortgage has always been a dilemma for borrowers. Once they decided to go short-term, they faced another quandary -closed or open. Closed was the cheaper alternative, but it meant borrowers would have to sit on the sidelines after the mortgage was booked until the next renewal, six months or a year away. Open would allow them to do more before the mortgage matured -renew, refinance, retire -but at a significantly higher interest rate. And what is the most important feature people want in a short-term open mortgage? The right to convert to a longer-term mortgage if rates rise.

Convertibility gives borrowers the utmost in both flexibility and security, the opportunity to play both ends against the middle. A hybrid, the convertible mortgage offers borrowers virtually all the short-term open features, including the option to lock-in to a longer fixed rate mortgage, at the cost of a short-term closed mortgage, with one key exception. The sacrifice: the ability to switch lenders if borrowers decide to lock-in before the mortgage comes due. So if they decide to convert before maturity, it must be with the same lender. Put another way, if a mortgage is fully open, it's convertible; but if it's convertible, it's not fully open. Considering the benefits of a convertible mortgage, most borrowers find this a small price to pay.

Unfortunately no standard or common definition exists for convertible mortgages. (The same is true of other features like portability and early renewal.) In fact, different lenders have different convertible terms and requirements. Learning exactly what the mortgage says is critical, if unpleasant surprises are to be avoided in the future.

How do convertible mortgages differ from lender to lender? Most don't force borrowers to lock-in to a longer term before the initial six months expires. The lock-in privilege can, but doesn't have to be used. If not, on maturity borrowers can renew for any term they want, including another six- month convertible term, or even switch lenders. But some lenders' convertible clauses force borrowers to renew with them before the first six months are over, for a term of up to five years -not what borrowers expect from a convertible mortgage!

Can the conversion take place at any time, or only on a payment date? The latter won't help much if rates soar mid-month.

If the conversion feature is triggered before maturity, for how long must the borrower lock-in? Many lenders let borrowers choose their own term, from a minimum of one year to a maximum of five years. But other lenders have lower or higher minimums.

Just like with portability, many lenders claim their mortgages are convertible, but few say so in writing. Relying on a lender's "policy" is risky, since there is no guarantee that the policy will still be around when the borrower decides to convert.

While convertible mortgages are fabulous for borrowers, lenders like them too. Keeping clients for long periods of time has become very difficult, especially with the popularity of short-term mortgages and the switch/transfer-in option that's now available when a mortgage matures. By offering the most important features of a short-term open mortgage at the short-term closed rate, lenders have developed an effective way to retain their clients and encourage them to commit to longer terms during periods of rising interest rates.

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