Open Mortgage vs Closed – the Key Differences

Open Mortgage vs Closed:

Purchasing property, many Canadians struggle to choose between an open mortgage vs. closed one. Choosing a house or apartment, each of us starts from our personal preferences and capabilities. Therefore, banks offer flexible programs with different conditions. One of these possibilities is an open or closed mortgage.

One Variant — Different Meanings

The distinguishing feature of one type compared to another is the money issue. Open-ended mortgages have sweet conditions, although they can end up being expensive for your budget. However, closed ones have definite terms, although they do not have high-interest rates. In addition, if you decide to pay more than usual at one time, be prepared to see a fine.

Please note: If you cannot cope with the debt burden caused by a closed mortgage, the best way to pay off the debt is to refinance a loan or sell real estate.

The differences between the two programs:

Open mortgageClosed mortgage
Large overpayment;The borrower can refinance the debt at any time without any problems;No need to pay additional fines;No penalties for late payments.Lower percentages;Fixed monthly payments;Penalties for increasing the size of a regular payment;High penalties for late payments;Difficulties with refinancing.

When considering an open mortgage vs. closed one, you should keep in mind that an open type gives homeowners the ability to repay the mortgage at any time. 

The closed type comes with a little stricter rule — if you pay it off before it expires, you will have to pay a fine. Despite all the difficulties, Canadians prefer the closed type because this mortgage program has lower interest rates.

Please note: If you are confident in your financial capabilities and do not plan early repayment, then the additional options of an open credit will not be useful to you. 

Open Mortgage vs Closed: Distinctive Features and Similarities

As mentioned earlier, a closed mortgage is the best option if you are confident in your financial capabilities. Most Canadian residents do not need the additional elements of a flexible open mortgage, which is why they often prefer the closed type. Besides, a big plus in favor of a closed mortgage is a low-interest rate, which allows significant savings in the long term.

Practical advice on how to choose between two programs:

  • If you are planning to enter into an inheritance, then choose the open type.
  • If you do not expect to receive a large amount of money to pay off debts in the next few decades, then you need a variable closed mortgage.
  • If you are planning to sell a property or a car, your choice is an open type if this money will be invested in a mortgage.
  • If you are expecting a promotion and a salary boost, choose an open type of mortgage. In this case, you will be able to make any payments without paying fines.

To summarize, a large amount of money expected shortly is an opportunity for early repayment, which means you need to choose an open mortgage. If you have other plans for the money, and you are calmly paying regular payments, then there is no point in overpaying — your choice is a closed type.

Features and Capabilities of Variable Rate

Speaking about the closed mortgage definition, it is worth noting the possibility of a variable rate that has reduced early repayment penalties. If you are in an uncertain financial position, variable rates may be a better option. In doing so, you get:

  • low home loan rates;
  • minimum penalty in case of refinancing or prepayment.

However, this option also has its drawbacks. The main one is that the bank can change the current lending rate at any time. Of course, this will increase the regular payments of the borrower and may negatively affect his planned budget. 

Open Mortgage vs Closed: FAQ

What is an open mortgage and is it possible to repay a closed one ahead of schedule?

An open mortgage can be repaid in full at any time without penalties, while a closed one allows only limited one-time down payments and includes a contractual penalty if fully repaid before expiration.

I have a closed-type mortgage and I want to get out, is it possible?

If interest rates go up after you take out a closed mortgage, you can usually exit early by paying a penalty of three months interest. 

Which option is better – mortgage or rent?

It depends on your goals and capabilities. Sometimes people prefer to keep their savings in the bank and live off the interest. However, owning a home is also a great investment and saves a lot of money.

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