Which option is best: an open or closed mortgage? No matter whether you are a first-time homebuyer or renewing your existing mortgage, there are times when open mortgages in Ontario make better financial sense.
However, before making your final decision, you must be aware of your options. This guide will allow you to select the best mortgage type for your situation.
What is the difference between open and closed mortgages?
Before deciding, you need to know the difference between the two mortgage types. Then, you can make an informed decision based on your current financial situation. You will also have to select a mortgage that fulfills your needs and doesn’t place a financial strain on your budget.
A closed mortgage cannot be prepaid, renegotiated, or refinanced before the end of the term without getting a penalty. When you decide on a closed mortgage, you are bound to its terms and conditions throughout the duration of the term. The contract’s duration is decided by you and ranges from six months to 10 years. However, most homeowners go for a five-year long term.
A closed mortgage can be beneficial if you want to make fixed monthly mortgage payments. Additionally, this could help those who have a family and are budgeting their expenses.
Be aware that you will need to break the mortgage if you sell your home or move. When you move or sell, you will incur penalties and fees.
Open mortgages in Ontario provide greater flexibility. Regular payments can be increased, which is a great option if you want to make a lump-sum payment without penalty.
The downside to open mortgages is that interest rates can be higher than closed mortgages. While paying a premium for the privilege of having this mortgage type may make little financial sense, there are some instances when you can save money long-term.
If you are expecting a large sum of money or there is a possibility that you may need to sell before your term’s maturity, then open mortgages are a better option. In these situations, you will not incur payment penalties for paying down the mortgage or breaking it. Also, refinancing is easier with an open mortgage.
While this may sound ideal, be aware that you will need to pay administration charges to be released from the mortgage.
How do you choose between the two?
When determining which is better for you, ask these questions:
Am I expecting to receive a large sum of money that I can use to pay off the mortgage?
Will my household income increase, allowing me to make extra payments? (Increases can come in the form of raises, bonuses, or commissions.)
Will I need to move or sell my home before the maturity date?
Suppose you answered yes to any of the previous questions. Open mortgages may assist you in avoiding high fees when exiting your mortgage. This is when having an open mortgage becomes useful.
For more advice on which mortgage type is best for your situation, reach out to Northwood Mortgage. To book an appointment, call 416-969-8130 or contact us here. Our dedicated team of professionals will work with you to determine the best solution to meet your financial goals.