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Open vs closed mortgages: Everything you need to know

If buying a home has been on your mind, you’ve probably envisioned what the perfect house looks like before you’ve even started searching for it. One of the factors to be considered before making a purchase decision is the type of mortgage that meets your requirements. Read on to learn more about the differences between an open and a closed mortgage.

closed vs open mortgage

Before we begin, what is a mortgage?

A Mortgage is a loan that allows you to purchase a property. In Canada, you have to make a 5%-20% down payment for any property purchase. The down payment is calculated on the purchase price, and the remaining amount can be borrowed as a mortgage. You can choose between having a fixed or variable interest rate and decide if you want an open or a closed mortgage. To select the best mortgage option, assess your financial goals against the mortgage cost, including closing fees and penalties.

Open vs closed mortgage: what is the difference?

Whether you choose a closed or an open mortgage, it’s essential to ask yourself these questions. Do you think of this purchase as a long, or short-term commitment? Are you planning to sell the house soon, or are you looking for a place to settle down? Once you have an answer to these questions, you can start analyzing the mortgage options, which are as follows:

  • Open mortgage
    An open mortgage allows you to pay out your full mortgage early without penalties. Even though this rarely happens, it gives you some flexibility. One of the downfalls of an open mortgage is that it has higher interest rates. The mortgage term is typically five years. Usually, homeowners opt for an open mortgage under unique circumstances.
  • Closed mortgage
    A closed mortgage is the most popular option in the real estate market because it offers low interest rates. However, there are penalties involved in renegotiating or paying off your mortgage before its term ends. A closed mortgage does offer you the option of increasing your monthly payments, which means you can pay off your loan faster. Although, you cannot use a sudden influx of income to pay off your mortgage much earlier than expected as this will involve paying additional interest charges.

Choosing between an open & a closed mortgage:

We recommend you assess and find the best mortgage solution based on your unique requirements. Since both mortgages have different characteristics, we will outline the factors that come into play depending on the one you choose.

  1. Lump-sum payment
    It is a benefit that you can only enjoy if you have an open mortgage. You can make a large payment whenever you want to without worrying about penalties.

  2. Low mortgage rates
    Even though an open mortgage offers greater flexibility, the interest rates are higher. A closed mortgage will take you longer to pay, but it comes at a lower interest rate.

  3. Increase regular payments
    While you can do this with both mortgages, it generally has more application to closed mortgages and can only be considered an advantage for that category. However, we advise you to check the conditions set by your lender first, especially when it comes to closed mortgages.

  4. Refinancing
    An open mortgage is a perfect option if, at any point, you want to refinance your mortgage. Closed mortgages, on the other hand, can be more complicated to refinance.

  5. Mortgage term
    It can either be a pro or a con, depending on your financial stability and goals. Open mortgages are short-term, usually five years or less, which is a good option if you plan to sell the property. On the other hand, if you are looking for a house to settle down in, a closed mortgage with a longer term may be a better option.

How to choose the right mortgage type?

Most Canadians choose a closed mortgage on account of the lower interest rates. But, that does not mean it is the right choice for you. Please consider the following factors before making a decision.

  • Ability to make regular payments
    If you have steady employment and a stable income, you can make regular mortgage payments. Plus, if you get a bonus, you can choose to make additional contributions towards your mortgage. An open mortgage may be a better option for borrowers with a high surplus income. However, if you have temporary or unstable employment and very little extra income, a closed mortgage might be a better option.

  • Monthly expenses
    If you have a strict monthly budget, a closed mortgage will be a better option, allowing you to save more for your expenditures and allocate less towards paying off interest charges.

  • Selling the property
    If you don't plan to live in the property but rather use it as an investment and sell it soon, an open mortgage may work out better and help you avoid penalties.

At Mortgage Maestro, our team of financial experts can help you select the best mortgage option. Contact us today to learn about what we can do for you!