Open Mortgage vs. Closed Mortgage
Open Mortgage vs. Closed Mortgage
Both open and closed mortgages offer benefits and advantages for home purchasers. Some of the factors to consider before deciding on one or the other include job stability, personal finances and family situation.
One of the main differences between open mortgage and closed mortgages are prepayment penalties. With a closed mortgage, if you want to pay off your balance early, you will incur prepayment penalties.
Open Mortgage
An open mortgage allows you to pay back the borrowed funds without notice or penalty. In other words, when you have extra cash, you may make extra principal payments. If you decide to sell, because of job relocation or change in family situation, you can pay off the loan without a prepayment penalty.
If you are self-employed, work on commission or otherwise don’t have a regular income, this option is worth serious consideration.
This is an ideal option if you desire flexibility either until you’re ready to lock in to a closed mortgage or don’t plan to remain in your home more than a few years.
Closed Mortgage
Closed mortgage have terms that are set for the original life of the loan. Often closed mortgage cannot be prepaid, even with a penalty unless the lender agrees. Most closed mortgages, though can be paid out but with a substantial prepayment penalty charge.
Borrowers can usually obtain a lower interest rate on a closed loan versus an open mortgage loan, there is less flexibility with this type of loan. That being said, if a closed mortgage is what you want, your broker will make sure that it has the most pre-payment options available. Some banks like RBC and CIBC only offer a 10% pre-payment privilege on their closed mortgages. However a broker can get you a closed, fixed rate mortgage with as much as 25% pre-payment privilege.
If your life and family situation are stable, a closed mortgage affords you the security of knowing how much your monthly payment will and for how long. If you don’t plan to move for the period of the loan, this may be a great option for you.
At Averbach Mortgages, we know about most of the best mortgages available in Canada. We’re experts and we can walk you through which type of mortgage is best for you. Give us a call!
