Mortgages come in all different shapes and sizes to fit each borrower’s unique circumstances. While the vast majority of mortgages arranged in Canada are what we call closed term mortgages there are open mortgages as well which can be useful to address certain borrower’s needs. In this post I’ll compare the two mortgage types and give you enough info so you can determine which option is best for you.
Lenders frequently offer two types of mortgages for various terms: open and closed.
The main difference between open and closed mortgages is the amount of flexibility you have in making extra payments on the principal or in paying off the mortgage completely. These types of extra payments on a mortgage are called prepayments. Since there is greater flexibility in an open mortgage and it can be paid off at any time open mortgages have a higher interest rate than closed mortgages.
With an open mortgage agreement:
- you can make prepayments at any time during the term, or even pay the mortgage off completely before the end of the term, without having to pay any penalty;
- the interest rate on an open mortgage is usually higher than on a closed mortgage with a comparable term length.
With a closed mortgage agreement:
- if you want to change your mortgage agreement during the term (for example, to take advantage of lower interest rates), you will usually have to pay a penalty to break your mortgage term agreement;
- the mortgage lender may let you make prepayments without penalty; – prepayment privileges on closed mortgages vary from lender to lender. For example, one lender might let you put a 20% lump sum payment every year, while another might only let you put 5% down every year.
- the interest rate on a closed mortgage is usually lower than on an open mortgage with a comparable term length.
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