Open vs. Closed Mortgage: What Is the Difference?

Posted on 19th May 2016

Should you go with a closed, open, or convertible mortgage ? There are a lot of factors you need to consider when assessing your financial and lifestyle goals and how quickly you want to pay off your mortgage .

What Is a Closed Mortgage?

A closed mortgage is a good option for those who are not on the fast track to paying off their mortgage. With a closed mortgage, you agree on a term, which can range from half a year to 10 years. The initial interest rate for a closed-term mortgage is usually lower than the rate for fully open mortgages. As a result, many homeowners choose a closed mortgage because it allows them to save on interest costs.

At the same time, a closed mortgage comes with a number of penalties. You need to pay a prepayment charge if you want to renegotiate the interest rate, prepay more than your mortgage allows, or pay off your mortgage balance before the term is up.

The fees are not inconsequential. The penalty is usually three months of interest or the interest rate differential, depending on which one is higher.

So, if you do not intend to sell the property before the term is up or refinance, or if you have no intention of prepaying any portion of the mortgage above what is allowed, a closed mortgage might make the most financial sense.

What Is an Open Mortgage?

Open mortgages are an attractive option for those who want to pay off their mortgage as fast as possible. With an open mortgage, repayment terms are much more flexible than with a closed mortgage. It can be repaid either in part or in full at any point without a penalty. Open mortgages can also be converted to any other term at anytime—all without incurring a penalty charge.

This kind of flexibility is not free. Interest rates for open mortgages tend to be higher than rates for a closed mortgage because of the prepayment flexibility.

While the interest rate will be higher, an open mortgage has a lot of short-term advantages. For example, an open mortgage is advantageous for those who have an income that varies. If you’re self-employed and earn an extra $2,500, it can be applied to the mortgage without penalty.

An open mortgage is also a great idea for those who expect their income to increase or those who want to pay down their mortgage as fast as possible. The faster you pay down your mortgage, the less interest you pay.

What Is a Convertible Mortgage?

A convertible mortgage gives you the same benefits as a closed mortgage, but it can be converted to a longer-term closed mortgage at any point without any penalty fees.

Why would you want a convertible mortgage? A convertible mortgage might be a good option if you think mortgage rates are going to decrease in the near-term. A convertible mortgage could also be a great idea if you’ve found your dream home but need more time to decide which mortgage option is right for you in the long term.

Helping Those in Toronto Find the Best Mortgage

At , our independent, licensed agents will sit down with you and help determine which type of mortgage is best for you. As the country’s leading low-cost private mortgage solution provider , will explain the advantages and disadvantages of an open mortgage, closed mortgage, and convertible mortgage.

Our agents draw from hundreds of banks and lenders to help you secure the mortgage products best suited to your financial and lifestyle needs.

To find out what kind of mortgage product is best for you, contact today. Or apply o nline and a lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.

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