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Open vs Closed Mortgages in Canada
Now you can listen to our blog post, “Open vs Closed Mortgage in Canada” while on the go.
When it comes to mortgages, you have plenty of options to choose from. Two such options include open and closed mortgages. Each one is designed with a specific borrower in mind, which is why you will need to determine what your particular needs are before choosing one over the other.
Let us take a closer look at each mortgage type and which option you must pick depending on suitability to your needs.
What Is A Mortgage?
A mortgage is a type of loan that homebuyers take to finance the purchase of their home. The home itself is used as collateral against the loan. This allows the mortgage lender to repossess the property in the event that the borrower defaults on the loan payments.
In this, the entire loan amount should be paid back by a certain date via instalment payments, which include the loan amount plus interest.
Types of Mortgages In Canada
When applying for a mortgage, the most important choice to make is between an open or closed mortgage. Each has its own advantages and disadvantages, so it is important to understand what each mortgage type is and assess it based on your specific situation.
Closed mortgages typically come with terms ranging from anywhere between 6 months to 10 years. The interest rate in closed mortgages is usually low than in open mortgages. Also, they are more popular than open mortgages among homebuyers in Canada because most prefer to have a longer time period within which to pay off their mortgage. The closed mortgages also come with fixed monthly mortgage payments, making budgeting much easier.
Closed Mortgage Prepayment Policies
Closed mortgages contain a lot of rules and restrictions, and you can’t usually pay off your mortgage early without incurring a penalty. You also won’t be able to renegotiate or refinance your house loan before it expires. If you pay off your mortgage early, you may be charged an early repayment penalty fee, which might be several thousand dollars.
However, certain closed mortgages may have a prepayment clause. If this is the case, you may be able to increase your monthly payments by a set amount or make a single lump-sum payment every 12 months if you have the funds. The
Benefits of a Closed Term Mortgage
- Rates of interest are lower.
- If the borrower wishes to pay off their debt faster, this is a better option.
- Because of the decreased interest rates, the cost of borrowing will be lower.
- Pre-payment alternatives may be available, allowing you to pay off your mortgage sooner.
- It’s possible to make one-time payments or increase the amount of money you pay each month.
Drawbacks of a Closed Term Mortgage
- Mortgage terms cannot be refinanced or renegotiated without incurring penalty penalties before the loan matures.
- The terms are lengthier, ranging from six to ten years.
- Because the interest rates are lower, there are additional limitations on how you can make payments.
- If you decide to refinance your mortgage and pay off the loan early, you will be charged penalty fees.
Although the lender is not required to hold the loan until it expires, open mortgages often have shorter periods of 5 years or less. Open mortgages, unlike closed mortgages, allow borrowers to return the whole amount of the loan, renegotiate the terms, or restructure the loan at any time with no penalties.
Borrowers who believe they will be able to come up with big quantities of money from time to time to put towards the principal component of their mortgage may find this option more appealing. Borrowers may be able to pay off their mortgage sooner if they do so, which not only decreases their overall debt but also saves them money on interest.
Open mortgages often have a higher interest rate than closed mortgages in exchange for more flexibility. You can expect to pay the prime rate plus a premium on an open mortgage.
Benefits Of An Open Mortgage
- The borrower has complete freedom and flexibility in terms of making payments.
- If a borrower chooses to pay off their loan early or refinance, they will not be charged any fees.
- Because the term is shorter, if the borrower is experiencing financial difficulties, they will be able to achieve maturity sooner or refinance if they so desire.
Drawbacks Of Having An Open Mortgage
- Higher interest rates; the open mortgage’s flexibility allows lenders to offer higher interest rates.
- Because of the higher interest rate, the cost of borrowing will be greater.
How to Know Which Mortgage Option Is Right For Me?
Your decision on whether to get an open or closed mortgage should be based on your present financial condition as well as your long-term goals. While flexibility may not be a priority for some borrowers, it may be essential for others.
Consider An Open Mortgage If:
You Want to Sell Your Home: You’re probably going to sell your house soon. If you want to sell your house soon, an open mortgage will protect you from any early repayment penalties that you might incur if you broke your closed mortgage early.
Expect To Receive a Big Inheritance: If you know you will get a large quantity of money as an inheritance, you could apply it to your mortgage principal, which would be doable with an open mortgage.
Your Earnings are Expected to Rise: You might be able to put extra money toward each mortgage payment if you expect a large rise at work.
Consider a Closed Mortgage If:
You Plan to Settle Down: You don’t need the flexibility to break your mortgage early if you don’t expect to sell your home in the next few years. In this scenario, taking out a closed mortgage to take advantage of a cheaper interest rate makes more sense.
No Financial Changes: Your financial condition is expected to remain unchanged. A closed mortgage can be right for you if you don’t expect your income to alter or if you don’t have any inheritance money coming your way.
The Bottom Line
At Lionsgate, we specialize in helping people get the extra cash they need, obtain funding for private mortgages, as well as for other real estate transactions. If you are looking to buy land in Canada, get a mortgage or apply for a loan, fill out the form below. Or, You can leave us a message and we will try to connect you with local lenders and sources that best meet your needs.
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