Mortgage advice in Calgary

Sep 21, 2020 | Mortgages | 0 comments

Open vs. Closed Mortgages

Mortgages | 0 comments

Canadians have a lot of options when it comes to choosing their mortgage products. How many years do you want to term to be? 1, 3, 5, 10 years? Do you want the mortgage rate to be fixed or variable? And, do you want the mortgage to be open or closed?

Many mortgage seekers believe that it doesn’t matter which one they choose, and they just seek the lowest mortgage rate. Since every mortgage will be fitted to what would be most comfortable for you. Unfortunately, making the wrong decision will definitely have a big impact on your savings or payments in both the short and long term. 

Below we give you the lowdown on Open Vs Closed Mortgages and why you should be in the know if you’re in the market for a new mortgage or renewal in Calgary.

mortgages in calgary

What is an Open Mortgage?

Open mortgage is a term used when a client requires full flexibility for to repay the mortgage very quickly. This means that you can pay the entire mortgage off at anytime without penalty. Open mortgages are usually used by Canadians who would be expecting to have a large amount of money come available in the first year of their mortgage to pay the loan to zero. Examples of this would be the sale of a home, a large inheritance or a large bonus from their employer.

Refinancing your mortgage will also be less expensive and more easily possible when you’ve got an open mortgage term. Overall, the idea is that you’ve got a plan in place to pay the mortgage off early and move on another product.

The big disadvantage with open mortgages (compared to closed mortgages), would be the difference in rate. Open mortgage rates tend to be about 3% higher than closed mortgage rates.

What is a Closed Mortgage?

A Closed mortgage, on the other hand, is your traditional mortgage. Low rates, regular payment schedules and ability to pay only a portion of the loan in addition each year. Closed mortgages are the best option if you’re planning on staying in the home for more than a year and want to pay the least amount of interest.

A closed mortgage is the most commonly used mortgage as most Canadians budget their spending monthly. Low interest rates and planned, lower monthly payments are the big appeals for closed mortgages.

Closed mortgages provide a little less flexibility to play off the mortgage quickly. You will be bound to paying the mortgage over at least 5 years. If you pay the mortgage off (or more than 20% of the principal balance within a year), you will incur mortgage pre payment penalties. Refinancing will also be expensive and more difficult under this type of mortgage. 

open vs closed mortgages in calgary

Should I Choose An Open or Closed Mortgage?

Here are possible scenarios that can differentiate which mortgage may be more suitable:

Open Mortgage:

  • You’re expecting a large increase in income

  • You’re expecting a large lump sum of money coming in soon (inheritance)

  • You’re expecting to pay off the mortgage with they proceeds of a home sale

Closed Mortgage

  • You’re seeking steady fixed rate & repayment over a span of time

  • You’re seeking low interest rates

Bottom line

Choosing the type of mortgage the right type of mortgage is essential. This will determine how much money you are going to save or spend as well as the length of time that you’ll be paying off your mortgage. Seeking help from your licensed mortgage broker will definitely help you in making the best decision, specific to your overall needs.

Related Calgary Mortgage Blogs