Posted onNovember 25/2014
The various types of mortgages can seem bewildering to the first time homebuyer, but understanding all your mortgage options will help you make the best financial decision when choosing your mortgage. This article explains the difference between a closed mortgage and an open mortgage.
What is a closed mortgage?
A closed mortgage agreement is a mortgage which can not be renegotiated, repaid, or refinanced for the duration of the mortgage (i.e., until the mortgage reaches maturity). If you wanted to make any changes to your mortgage, you would be subject to a prepayment charge.
What is an open mortgage?
An open mortgage agreement is much more flexible than a closed mortgage. You will be able to make prepayments at any time, and in some cases may be able to pay off the mortgage before the end of the mortgage term, with no prepayment charges.
The interest rate for open mortgages is usually higher than the rate for a closed mortgage with comparable terms. Open mortgages are often only available for short terms (6 months to 1 year are common).
Advantages and disadvantages of a closed mortgage
The main advantage of a closed mortgage is the (usually) lower interest rates, compared to an open mortgage. If you think the interest rate you are offered is good, a closed mortgage would give you the stability of knowing your rate would not increase for the duration of your term.
Closed mortgages are also a good choice if you plan to have your mortgage for the long term. You will save on interest costs, as your rates will be lower than an open mortgage. In the long run, this saving may help you pay your mortgage off faster.
The disadvantage is the lack of flexibility. If, for example, you wanted to change your mortgage agreement to take advantage of lower interest rates, you will have to pay a fee. Similarly, if you wanted to pay a lump sum towards your mortgage, you may only be permitted to pay down a certain percentage, such as 10%.
Advantages and disadvantages of an open mortgage
The main advantage of an open mortgage is the flexibility you will have. If you save or inherit a lump sum and want to put it towards your mortgage, you can do so! Open mortgages are best if you plan to pay off your mortgage in the near future. They are also best if you plan to sell your home soon.
The disadvantage of an open mortgage is that if rates go up, when your mortgage term ends you will be faced with a higher mortgage.