Open or closed? Do you know which choice is right for you?
Closed mortgages offer lower interest rates than open mortgages. However, open mortgages boast fewer fees.
What is a Closed Mortgage?
Closed mortgages cannot be prepaid, renegotiated or refinanced before maturity without paying a penalty. Most closed mortgages do offer a bit of flexibility by allowing you to repay the principle through lump sum payments, or by increasing your monthly payment amount for your best mortgage rate.
When to Consider a Closed Mortgage
Since closed mortgages have significantly lower interest rates, they are more attractive to the average homebuyer.
When NOT to Consider a Closed Mortgage
If you think that you might need to break your mortgage early.
What is an Open Mortgage?
Open low mortgage rate terms range from 6 months to 1 year for fixed rates, and 3 to 5 years for variable rates. They can be paid off before maturity without penalty.
When to Consider an Open Mortgage
If you’re expecting to receive a large sum of money, an open mortgage will provide you with the flexibility to pay off your loan faster.
The Beauty of Prepayments with Closed Mortgages
Most closed mortgages offer prepayment options, including: lump sum payments up to a percentage of your principal each year, or increasing your monthly Canadian mortgage rate payment.
How Much Does a Closed Mortgage Penalty Cost?
If you do decide to break your closed mortgage before the end of your term, you could pay a penalty. The penalty you pay is the greater of either:
- Three months of interest
- Or the Interest Rate Differential (IRD): the difference between today’s interest rate and the rate you pay.