An "open" variable-rate open mortgage gives you maximum flexibility, allowing you to increase your mortgage payments at any time, without paying a penalty to your mortgage lender. You could even pay off your entire loan all at once. When you have an open variable-rate mortgage, you can still take advantage of locking into a fixed rate if floating rates begin to rise, or if you believe they will head higher in the future.
Open variable-rate mortgages have a fluctuating interest rate that typically only changes when the prime lending rate moves up or down. The interest rate will be set at the beginning of each month.
If you have a fixed-payment floating rate, it means your monthly payments will remain the same, even if interest rates fluctuate during the term. In this case, if the interest rate drops, more of your monthly payment will be applied to your principal rather than the interest, helping you pay off your mortgage faster.
Open variable-rate mortgages are most popular with homebuyers who plan to move in the near future, as their property can be sold and the loan discharged without any risk of mortgage prepayment penalties.
Learn more about open and closed mortgages.
The main difference between fixed and variable mortgage rates is whether they can fluctuate over time. Fixed rates will stay remain constant during your mortgage term (usually 5 years), while variable rates will change with your lender’s prime rate.
Fixed mortgage rates are more popular amongst first time homebuyers. You can benefit from a fixed mortgage, as you are protected against interest rate fluctuations, so your mortgage payments stay constant over the duration of your term. This allows you to budget and plan your future payments.
Variable mortgage rates are usually lower than fixed rates, but can vary over the duration of the term. This causes your mortgage payments to change over the period of your mortgage term. While variable mortgage rates are generally lower than fixed mortgage rates, they are riskier. Learn more about variable and fixed mortgage rates.
You should always consult with a mortgage broker to see the best options for your home purchase and compare a variety of mortgage rates in Canada. Compare the best fixed rates and variable mortgage rates on RATESDOTCA.
Here are common open variable-rate mortgage questions that most homebuyers have.
Prepayment mortgage options give you the flexibility to increase your monthly mortgage payments also known as paying lump-sum amounts, or pay off the whole mortgage before the term with any penalties. The monthly prepayment option is a usually a percentage increase allowance on your original monthly mortgage payment.
Here’s an example:
If your monthly mortgage payment is $2,000 and your prepayment allowance is 25%, then you’ll be able increase your monthly payments up to $2,500. The lump sum prepayment amount applies to your mortgage principal. If your lump sum prepayment allowance is 25% on a $200,000 mortgage amount, then you can pay $50,000 off the principal every year.
When you see your mortgage loan contract, the rate hold clause refers to how long before the mortgage renewal date can you lock in a mortgage rate, should that interest rate be a favourable one. The renewal date is the date when the mortgage term expires, not to be confused with the amortization period. For example, if you have a 5-year term on your mortgage, and a 60-day rate hold, then within 60 days before the expiration of the term, you have the option to lock in the current mortgage rate.
Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.
Here at RATESDOTCA, we compare rates from the best Canadian mortgage brokers, major banks and dozens of smaller competitors.