One-year fixed terms are one of the shortest commitments among mortgage terms. While 1-year terms in general offer borrowers more flexibility due to the shorter commitment period, a 1-year fixed open mortgage provides the ultimate in repayment flexibility, as it can be repaid in part or fully at any time.
One-year terms aren't very popular with Canadian mortgage shoppers, as only about 5-6% of borrowers choose one, according to Mortgage Professionals Canada. One-year fixed open mortgages make up an even smaller piece of that pie.
Like 6-month open mortgages, 1-year fixed open mortgages can be a good short-term mortgage solution, with borrowers typically intending to renew into a longer mortgage term afterwards. Since it’s an open mortgage, a borrower can repay any amount of the loan at any time without penalty.
But that payment flexibility comes with a price. One-year open mortgage terms are priced significantly higher than comparable closed short-term mortgages.
This rate premium is largely due to the absence of a prepayment penalty. Because borrowers can repay the loan at any time, the loan is riskier for lenders to fund since they don’t know if they’ll receive the full interest cost over the term or if the loan will be repaid sooner. That creates “prepayment risk,” meaning the lender earns less profit at a given rate, versus a closed mortgage.
These are some advantages for a shorter term mortgage.
There are also some disadvantages to consider.
Higher interest rates: Due to the prepayment flexibility of an open mortgage rate, interest rates tend to be significantly higher vs. comparable closed terms.
Renewal hassle: With such a short term, renewing just after a year can be a hassle, although most renew into a longer term.
Renewal risk: If you choose a short fixed term, you run the risk of renewing into higher interest rates when your term is up.
Learn more about 1-year fixed closed mortgages