What’s The Difference Between An Open And A Closed Mortgage?
posted in Mortgage News
When it comes to buying a home, there are many options available to suit every need, and just as there are choices of properties, there are varying mortgage options, too. With closed, open, variable, fixed, 3-year, 5-year and so on, there should be a mortgage out there for you, and when you meet with a mortgage broker, they will talk you through your options. One of the points they will discuss with you, is whether you want an open mortgage or a closed one, and as each is designed to suit different borrowing needs, it’s important that you make the right choice.
Here is some basic information about the two types of mortgages, so that when you meet with your chosen mortgage broker, you won’t have to start your discussion from scratch:
Open mortgages in brief:
These have flexible options that increase your mortgage repayments and enables you to increase your regular payments or do so with a lump sum.
Closed mortgages in brief:
A closed mortgage penalizes you if you pay off all, or part of your mortgage early, and offers a much lower rate of interest.
Should you choose an open or a closed mortgage?
Certainly here in Canada, the more popular mortgage is a closed one; with its lower rate of interest, most people find that they don’t need the option of being able to pay it off or increase their payments, and so choose a closed mortgage over the flexibility of an open one. Offering better value for the average Canadian, a closed mortgage can save you a significant amount of money over the duration of its’ term.
Those who opt for an open mortgage, usually do so because they expect to receive extra cash to pay it off in the near future, whether it be from an inheritance, a significant pay increase or the proceeds from the sale of a property. If you expect to receive a substantial sum of money weeks or months after you’ve bought a new property, then a more flexible, open mortgage might prove its worth for you.
Closed mortgages with variable rates of interest:
Your mortgage broker will be able to explain closed mortgages with variable rates to you in more detail, but in essence, these tend to have lower prepayment penalties than closed mortgages with fixed rates. If you think you might need to refinance or pay off your mortgage, then this mortgage might give you the lowest rates while limiting the potential size of any prepayment penalties.
Mortgages can be complex, and it’s not always easy to see which one will best suit your needs, however, if you seek advice and guidance from a professional mortgage broker, your options should become easier to understand and you’re more likely to make the right choice for your circumstances.