Open Mortgages vs Closed Mortgages

Open mortgages and closed mortgages are two different types of mortgages. The main difference between the two arises in the freedom of paying off your mortgage, with penalties (as is the case with closed mortgages), or without penalties (for open mortgages).

Open Mortgages

Definition: an open mortgage can be paid off at any time without penalties. You can also make additional payments without penalties. Open Mortgage terms range from 6 months to 5 years and can have variable or fixed interest rates. There will still be a minor fee to discharge the mortgage when paying out the mortgage or transferring to another lender. Mortgage interest rates for open mortgages tend to be higher than they are for closed mortgages because of their inconsistency in nature (i.e. it is harder for a lender to forecast returns due to its flexibility in payments).

Closed Mortgages

Definition: closed mortgages have lower interest rates than open mortgages. You cannot pay out a closed mortgage early without a penalty, but you can still pre-pay up to 20% of your original principle balance each year with most lenders. Closed mortgage terms can range from 6 months to more than 10 years. This type of mortgage can only be renegotiated or refinanced before it matures according to its conditions. A closed mortgage is more stable due to its restrictive nature, which is why interest rates are lower than they are for open mortgages.

Open vs Closed Mortgage Comparison

OPEN MORTGAGES CLOSED MORTGAGES

Differences: Shorter Periods Longer Periods

Pre-Pay Penalties: None (with minor exceptions) Yes

Able to Re-Finance Early: Yes - easy/free to refinance No - or limited to its terms

Differences in Mtg Rates: Higher Lower

Open vs Closed: Which is Better For You?

Closed Mortgages are usually a more popular product because of lower interest rates. Open Mortgages give you freedom to make extra payments at any time or pay out the mortgage in its entirety without penalty. Whether open or closed, what's best for you depends on your actual needs. If you plan on moving or selling the home within the next year, then an open term may best suit your needs. If you will not be relocated by work and intend on staying in your home for at least five years, then a closed mortgage may better suit your needs. If you are unsure, give us a call. We'll help you make an educated and informed decision today!

Closed Mortgage Prepayment Penalties

If you choose to sell your home or refinance your home, before the end of the term, you will have to pay a penalty to do so. This penalty will be the greater of three months' interest penalty or Interest Rate Differential (IRD). The three months' interest penalty is the next three months interest portion of your loan as one payment. Interest rate differential is calculated when today's interest rate is below the interest rate contracted when you obtained your mortgage. To determine the amount of the penalty, the difference between the two rates is multiplied by your balance and then by the remainder of your term. The earlier in your term, the larger the penalty. Consult an experienced mortgage broker today to see if there is a way around your penalty.

Article via Mortgages Canada

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