Mortgage vs. HELOC
Depending on your personal circumstances and preference, you can opt for either a closed or open mortgage. The main difference between the two has to do with the ability to pay off the mortgage during the term. If you're not sure which type of mortgage product is better suited for you it would make sense to speak to a licenced mortgage professional who would be able to advise you accordingly. Both types of mortgages are examined below:
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 however have some payment flexibility by allowing the mortgagor to increase the monthly payments by a certain percentage and pre-pay an additional annual amount as a percentage of the mortgage amount.
For example, let's take a mortgage of $200,000 with a $1,500 monthly payment and conditions that allow for a 100% increase in the monthly payment and a 20% annual pre-payment. That means that you can increase your monthly payments up to $3,000 and make a lump sum payment of no more than $40,000 in the given year. These conditions do however 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. 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. An open mortgage has a term, however, the mortgagor does not have to hold it until its maturity. Open mortgages tend to have higher mortgage 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 (5 years or less).
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 should best be discussed with a licenced mortgage professional.