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Weekly Advice Series: The next big question – “Should I get an open or closed term mortgage?”

Open vs. Closed Term Mortgages

open vs closed term mortgagesOnce you have decided whether or not you are more comfortable with a Variable Rate Mortgage vs. Fixed Rate Mortgage, it is time to consider the options available on the mortgage term; that is, whether to obtain an Open or Closed term.

The mortgage term is the length of time your mortgage agreement will be in place with the Lender (for example, three years or five years). At the end of this contractual term, you will need either renew or renegotiate your mortgage, unless you are able to pay it off fully at that time. Refer to the Mortgage Renewal page to see why this step is so important and often so overlooked!

The main points of interest and difference between open and closed mortgages is how much flexibility the Lender gives you with respect to making extra payments on the principal or in paying out the mortgage entirely. These extra payments on a mortgage are usually called prepayments to a mortgage.

Open mortgages

With an open mortgage:

  • you can make prepayments at any time during the term, or even pay out the entire mortgage balance completely before the end of the term, without incurring any penalties.
  • One thing to keep in mind is that the interest rate on an open mortgage is usually higher than on a closed mortgage with  the same term length.

Closed mortgages

With a closed mortgage:

  • if you want to alter your contractual agreement during the term (for example, to take advantage of lower interest rates being offered), you will usually have to pay a penalty to break your existing mortgage term.
  • In most cases, the Lender may allow you to make prepayments without incurring a penalty.
    • prepayment privileges on closed mortgages may be different depending on the lender. For example, one lender might let you put a 20% lump sum payment every year, while another might only let you put 10% down every year.
  • the rate on a closed mortgage is usually lower than on an open mortgage with the same term length.

Contact me and we can review the options together.

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