Not every homebuyer has the same needs, which is why there are different mortgage options. One of those options is whether to get an open or closed mortgage. You’ll need to consider the pros and cons and see what option best fits your needs.
An open mortgage is one that you can change at any time – refinance, pay off in full or re-negotiate – without any financial penalties. They are often for terms shorter than five years.
A closed mortgage is one that you cannot pay off or change before the end of the term without paying some penalty or fee. In Canada and especially in cities like Toronto, closed mortgages are the most common among borrowers, with terms lasting about five years.
Pros and Cons of Open Mortgages
An open mortgage offers homebuyers more flexibility and adaptability to change plans on a whim without suffering serious consequences. However, it does come with higher interest rates for that extra freedom.
Yet, if you are not sure what changes may be in store for you in the next few years, having the option to pay down your loan faster or change the terms can be attractive. For example, if you anticipate getting a pay raise, you’ll be able to increase your monthly mortgage payments without being charged fees by your lender. If you are willing to pay a little extra each month for the peace of mind of being penalty-free no matter what comes, then an open mortgage is right for you.
Pros and Cons Of a Closed Mortgage
A closed mortgage does not offer the same pre-payment flexibility as an open mortgage, but on the other hand, it comes with a lower interest rate. Many homebuyers are attracted to the lower rate of a closed mortgage.
The drawback of a closed mortgage is the pre-payment penalty you’ll face if you want to pay more than the monthly mortgage payment. For example, if you get a raise or a monetary gift and want to put it towards paying down your mortgage, there will be a limit on how much you can pay before you face extra fees. These fees can be significant.
Getting the Best Mortgage For You
When it comes to finding the right mortgage for you, you must understand your options so you can choose the best one. Some homeowners may value the flexibility to make pre-payments on their loan, while others don’t need this option and would be better with a lower rate. Here are some things you’ll need to consider:
- Will you be selling your home and want to pay off your mortgage?
- Are you expecting an inheritance?
- Do you anticipate any income increase in the near future?
You can always discuss your situation and needs with a mortgage broker. They are skilled professionals who deal with several different lenders and will be able to offer you unbiased advice.