What’s the Difference Between an Open and a Closed Mortgage?
11 June, 2012 / by Bryan Jaskolka
Most homeowners and homebuyers know the difference between a fixed rate and a variable rate when it comes their mortgages. But what about choosing between open and closed Ottawa mortgages? The difference could be huge, and could mean thousands of dollars in savings for you, if you know how to pick the one right for you.
Open mortgages are those that you can pay off in full, at any time, and you will have no penalties charged against you. While there will still be a fee associated with transferring the mortgage to another lender, the homeowner still has the option to pay off as much of their mortgage as they want, whenever they want, without paying too much. Open mortgages typically have terms of 6 months to 5 years, and they can have either fixed or variable interest rates. However whichever the homeowner chooses, those interest rates are likely to be a bit higher so that the lender can still guarantee profits – profits which they could lose if the homeowner pays off their mortgage very early.
Closed mortgages trade that high interest rate for penalties that will be applied if the mortgage is paid off early. Even with a closed mortgage homeowners can typically pay off up to twenty per cent of the remaining principal with no penalties. Closed mortgages have terms ranging from 6 months to 10 years and renegotiating the contract can be somewhat tougher than it is in open mortgages. Usually with a closed mortgage if the homeowner wants home refinancing, or wants to change their mortgage in any way, they will be unable to do so until the time for their renewal is up. If any changes are made before that time, the penalty that will be applied is the equivalent of about three month’s interest.
So how do you know which one is best for you?
Closed mortgages are usually the more popular choice, because the low interest rates make up for their somewhat inflexible structure. However, because they also come with hefty prepayment penalties, they are not a good choice for those that are going to be leaving their home in the short-term. If you think you could be relocated soon for work, or you’ll have to sell the home for any other reason, an open mortgage is the best choice.
When determining whether you want an open or closed mortgage a full examination of your current needs, as well as what your future situation may bring, is a must in order to make sure that you get the best deal.