Should I Choose an Open or Closed Mortgage?
When applying for a mortgage there are a number of decisions that will need to be made. One of the most important decisions is whether to choose an open or a closed mortgage. The choice depends on your personal circumstances and preference for flexibility. These mortgages are designed for different borrowers as they depend on the ability to pay off the mortgage during the term. It is an important decision because choosing the right one can result in significant savings, while choosing the wrong one can result in additional costs.
What is an open mortgage?
An open mortgage offers some flexibility when it comes to payment. The mortgage holder can increase their regular payments or make a lump-sum payment on their mortgage at any time, without incurring any penalties. Refinancing is also more flexible and cheaper with open mortgages. Open mortgages do have a term (typically 5 years or less) but the holder does not have to hold it until its maturity. Interest rates tend to be higher with open mortgages due to the increased flexibility.
What is a closed mortgage?
A closed mortgage is one that cannot be fully paid off, refinanced or re-negotiated before the end of the term without incurring a penalty. An individual is bound by its terms and conditions for the duration of the term. If you decide to pay off the outstanding balance that you owe before you reach the end of the term, or decide you want to pay off more than allowed in a given year, you will be charged with a prepayment charge. Closed mortgages come with much lower interest rates allowing you to save on interest costs and pay off your mortgage faster. This type of mortgage can be beneficial if you want a fixed monthly mortgage payment which might help when budgeting for expenses.
How to decide whether to choose an open or closed mortgage?
Before making a decision there are a few considerations to take into account, such as your ability to make payments each month, your monthly expenses, whether you will be in a situation to pay off your mortgage early, or if you plan on selling your home before the mortgage end date. For most Canadian homeowners, a closed mortgage offers the best value. The flexibility that comes with an open mortgage is not needed for most individuals and since closed mortgages come with lower interest rates a significant amount of money can be saved over your mortgage term. The flexibility of open mortgages is beneficial, however, when additional money is expected in the near future that can be used to pay off your mortgage. A few situations where you might consider getting an open mortgage is if you intend to sell your home and pay off the mortgage with the proceeds from the sale, you have an inheritance on the way, or your income is about to increase due to a work promotion or additional work income. Putting the proceeds of that money towards paying off your mortgage early can save you interest in the long run.
We can help you make the best decision for your situation
There are a lot of decisions to make when looking for a mortgage, including whether to choose an open or closed mortgage. It is important to make the right decision as the result can mean a difference of thousands of dollars, either in interest or prepayment penalties. If you need help deciding which option best meets your unique situation or would like to learn more contact one of our mortgage specialists at Kingdom Mortgages.
Rock Capital Investments Inc. Brokerage #10556. Each office is independently owned and operated. Proud member of Mortgage Centre Canada.
Kingdom Mortgages Inc Brokerage #13608. Each office independently owned and operated. Proud member of Mortgage Centre Canada.
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