Open vs Closed Mortgages

Once you’ve been approved for a mortgage it’s time to think about what kind of rules you want to apply to them. You can apply to both open termed and closed termed mortgages that have their own advantages and disadvantages. Research into the topic will give you a better idea of what is right for you when considering the length of your term, your down payment, monthly payments and interest.

What is a closed mortgage?

A closed mortgage means that there are restrictions and what can be paid towards your loan. A closed mortgage is usually the more popular option considering it carries a lower interest rate. However, the terms of the mortgage may not be as flexible and may hold restrictions.

Advantages of a closed-term mortgage

  • Interest rates are lower
  • A better choice if the borrower wants to pay off their loan faster
  • The cost of borrowing will end up being less because of lower interest rates.
  • The possibility of pre-payment options that will allow you to pay your mortgage quicker
  • Lump sum payments and increasing monthly payment amounts are possible

Main advantage: Lower interest rates, lower cost of borrowing.

Disadvantages of a closed term mortgage

  • Mortgage terms cannot be refinanced or renegotiated before the loan reaches maturity without penalty costs
  • The terms are longer varying between 6 months to 10 years.
  • Because it has lower interest rates, there are more restrictions as to how you can make your payments.
  • If there is a possibility to want to refinance your mortgage and break the mortgage loan early you will suffer penalty costs.

Main disadvantage: No flexibility, hefty fines for those who want to refinance or break the mortgage before maturity.

What is an open term mortgage?

An open mortgage gives the borrower much more flexibility. A borrower will have the freedom to pay down their mortgage in its entirety whenever they choose without fines. The borrower will also be able to pay whatever they want towards their mortgage. There are no rules.

Advantages of an open mortgage

  • The borrower has the freedom and flexibility to pay what they want
  • The borrower does not need to worry about fines if they decide to pay off their loan earlier or refinance.
  • The term is shorter so if the borrower has some financial uncertainties they will have the freedom to reach maturity faster or refinance if they so choose

Main advantage: Payment flexibility

Disadvantages of an open mortgage

  • Higher interest rates; the flexibility of the open mortgage allows lenders to propose higher interest rates.
  • The cost of borrowing will tend to be higher because of the higher interest rate.

Main disadvantage: Higher rate of interest

When to choose an open mortgage or a closed mortgage

Choose and open mortgage if you expect a sudden influx of money whether it be an inheritance, a divorce settlement, sale of another property or insurance claim. If you have financial uncertainty it’s a better option. If you want to pay off your mortgage with flexibility choose an open mortgage.

If you want to pay less interest and decrease the cost of borrowing and have no qualms about being locked into conditions choose a closed mortgage. Closed mortgages are great for people who want to make stable payments that coincide with their budgets. Borrowers may pay less in interest in the long run and have a stable payment schedule.

Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.

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