Congratulations! You’re researching mortgages, which means you’re probably en route to purchasing property. Depending on your personal circumstances and preference, you can opt for either an open mortgage or a closed mortgage. The main difference between the two has to do with your ability to pay off the mortgage during the term. If you're not sure which type of mortgage product is better suited for you and your home buying situation, this guide aims to help. Research the differences between these two types of mortgage products, shop and compare open versus closed mortgages for your potential home purchase, and if needed, speak to a licensed mortgage broker for guidance. Knowing mortgage terms and definitions will be of great benefit to you when you look for and compare mortgages in Canada.
Without further ado, let’s dig into the differences between open mortgages and closed mortgages in Canada.
A closed mortgage is one that cannot be fully paid off, refinanced or re-negotiated before the end of the term without incurring a penalty. When you purchase a closed mortgage you commit to be bound by its terms and conditions for the duration of the term.
A closed mortgage can benefit you if you want a fixed monthly mortgage payment. This might help with your family budgeting of expenses; mortgage payments, groceries, heat and water, etc.
A closed mortgage can, however, offer some payment flexibility by allowing the mortgage holder to increase the monthly payments by a certain percentage and pre-pay an additional annual amount as a percentage of the mortgage amount. These conditions vary across lenders. If you decide to pay-off the mortgage prior to the end of the term, refinance it, re-negotiate the rate or even pay off more than the allowed pre-payment limit of the mortgage, you'll have to pay a pre-payment penalty. Keep in mind that this penalty can be quite significant. You can use our Mortgage Penalty Calculator to estimate the pre-payment penalty for various scenarios.
An open mortgage is one that can be fully paid off, refinanced or re-negotiated at any time without penalties. In other words, it has no pre-payment restrictions.
Pre-paying your mortgage can be of benefit to some. Say you get a substantial work bonus/commission, inherit money, or another money windfall. Putting the proceeds of that money towards paying off your mortgage early can save you interest in the long stretch.
An open mortgage has a term, however. The mortgage holder does not have to hold it until its maturity. Open mortgages tend to have higher interest rates compared to closed mortgages due to the pre-payment flexibility.
As a result, open mortgages are not as popular as closed mortgages. While closed mortgages are available across all popular terms, open mortgages tend to be available only for short terms, typically 5 years or less.
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If you do not anticipate having to pay-off the mortgage prior to its maturity (i.e. as a result of selling you home) or pre-paying more than the allowed limit of a closed mortgage, then a closed mortgage can be a suitable product for you.
If the flexibility of being able to pay off the mortgage at any time without incurring a penalty is important, then it has to be weighed against the higher mortgage rate offered by an open mortgage to determine if it's the best product for you.
Generally closed mortgages work best when your circumstances are not expected to change during the term, while open mortgages are suitable when you are likely to sell your home during the term or anticipate getting a large influx of cash (i.e. inheritance, divorce settlement, etc.) The decision is best discussed with a licenced mortgage professional.