Open Vs. Closed Mortgage

Overview

When it comes to deciding on a mortgage, the choices can appear endless; it can be a complex process which is why working with a licensed mortgage broker is very helpful.

A licensed mortgage broker can help guide you through the tough decision process of choosing whether you'd like a fixed or variable rate, what terms work best, and what amortization period will save you the most money.

They can also clearly explain confusing mortgage industry/banking jargon – AKA what the heck is an ‘open’ or ‘closed’ mortgage?

As Easy As 1, 2, 3 – Open & Closed

When organizing your mortgage agreement, you may encounter the option for an ‘open’ or ‘closed’ mortgage.

An open mortgage has no repayment restrictions, meaning that you have the flexibility to pay off your mortgage whenever you like without the risk of incurring pre-payment penalties.

A closed mortgage has restrictions on how payments can be made towards the principle balance, meaning that the mortgage can’t be refinanced or paid off prematurely without incurring the risk of a pre-payment penalty.

Given this information, choosing an open mortgage would be more beneficial than a closed mortgage – who wouldn’t want more flexibility?!...

…But, it’s not as simple as that. As with anything, the decision will be subjective to who it involves, and there are many more factors to consider.

Grab your magnifying glass and let’s take a closer look at what else matters.

Open Vs. Closed Mortgages

The Benefits And The Challenges Of Each Type Of Mortgage:

OPEN MORTGAGE: Benefits

• The ability to pay down your mortgage faster by increasing payment frequency
• Refinancing through a lender is often easier and less costly
• Borrowers are sometimes allowed to make lump-sum payments at anytime, adding to their home equity faster

• The flexibility of an open mortgage isn’t free – it often means higher interest rates to compensate the lender, which can cost you in the long run

• Usually much lower rates than an open mortgage which can save you money overall
• Repayment schedule is steady and dependable, making budgeting easy

• If a circumstance requires you refinance, it can be very expensive
• Pre-payment penalties on lump sum payments can also be very expensive

1. Which option do you think is best for you?
2. Which option do you think is chosen most commonly?


We can answer Question 2 right away: a closed mortgage is way more common in Canada.

This is because most people expect their life trajectory to be consistent and aren’t expecting any significant increases in income or financial gifts to pay off their mortgage. This makes them a better candidate for a closed mortgage because overall, they benefit from the lower rates.

A lower rate calculated over the amortization period of a 25 year mortgage can make a BIG difference in your pocket!

Now let’s take a look at Question 1: There is no definitive answer.

What’s best for you will depend on an assessment of your finances, your lifestyle, your goals, and your comfort level.

Connecting with a licensed mortgage broker can benefit you significantly with this decision; they’ll know the proper questions to ask you in order to recommend a suitable mortgage option for your unique lifestyle.

They’re pros in the industry and their recommendations for you are based off experience within the borrowing industry!

When Would A Mortgage Broker Recommend An Open Mortgage?

There are a number of reasons a licensed mortgage broker would recommend that you choose on an open mortgage. Using formulas, they would calculate whether the financial gain of a more flexible mortgage with higher interest rates may benefit you in the long run.

An open mortgage may benefit you if:

You’re receiving a sizeable inheritance or financial gift in the near future Ideally if you receive a large inheritance, rather than going to Vegas and spending all your money on your friends, you would invest it by paying off a lump sum of your principle balance

You’re expecting a LARGE increase in income Have you been offered a sizeable promotion by your boss? Amazing, congrats! If you’re expecting your income to increase significantly, it may make sense to pay more of it towards your principal balance.

You know you’ll be selling your home in the next few years If you only plan to own your home for less than the length of your mortgage term, when you decide to sell you shouldn't face any pre-payment penalties. This means that an open mortgage may actually benefit you because it gives you flexibility without the penalties!

Need More Tips Or Help With Your Mortgage?

Whether you’re a first time home buyer or you already own a home and you’re looking to renew/refinance your mortgage, I'd be happy to help.

If you’re interested in learning about what type of mortgage suites your best interests, please reach out to myself, Kyle Benzies (licensed mortgage broker); I work ethically with complete transparency to get the job done.

Give me a call to discuss your mortgage options, risk-free!



***other conditions may apply to anything listed above. The information provided on this page should NOT be implicitly relied upon, and may not be 100% up to date. It's best to contact us for the most current conditions/program offerings for first time buyers***