What is an Open Mortgage?
An open mortgage is a type of mortgage that offers the borrower a high degree of flexibility. One of the most attractive features of an open mortgage is the ability to make additional payments or pay off the mortgage partially or entirely without any prepayment penalties. This can be particularly beneficial for those who anticipate receiving a lump sum of money in the near future, such as a bonus, inheritance, or proceeds from the sale of another property.
Key Benefits of an Open Mortgage
- Prepayment Flexibility: With an open mortgage, you can make lump sum payments or increase your regular payments at any time, which can help you repay your mortgage faster and reduce the overall interest paid.
- No Penalties for Early Repayment: Unlike closed mortgages, open mortgages do not charge penalties for make early payment on your mortgage principle. Therefore, it an ideal choice for individuals who plan to move or refinance soon.
- Shorter Terms: This mortgage typically have shorter terms, often ranging from six months to one year. This can be advantageous if you expect to change your financial situation or want to renegotiate your mortgage terms anytime in future.
Drawbacks of an Open Mortgage
- Higher Interest Rates: The primary downside of an open mortgage is that they usually come with higher interest rates compared to closed mortgages. This is the trade-off for the flexibility they offer.
- Limited Availability: Open mortgages are not as commonly offered as closed mortgages by all lenders in the market, so your options may be more limited.
What is a Closed Mortgage?
A closed mortgage, on the other hand, is a type of mortgage loan that restricts you to pay off your mortgage principal early, locking you into certain terms ranging from 6 months up to 10 years. You will end up paying incurring penalties in case of breaking terms on closed mortgage.
This is commonly offered mortgage by most of the lenders and usually comes with lower interest rates compared to open mortgage.
Key Benefits of a Closed Mortgage
- Lower Interest Rates: Closed mortgage generally offers lower interest rates, result in significant savings over the life of the loan.
- Predictable Payments: Because of the fixed terms of a closed mortgage, your monthly payments will remain consistent, making it easier to plan budget.
- Longer Terms Available: The perk of having longer terms on your mortgage provides stability and can be beneficial for long-term financial planning.
Drawbacks of a Closed Mortgage
- Prepayment Penalties: The only disadvantage of closed mortgage is prepayment penalties for ending the terms early, either by paying off mortgage or making extra monthly payments on loan. These penalties can be substantial, limiting your financial flexibility.
| Features | Open Mortgage | Closed Mortgage |
|---|---|---|
| Financial Flexibility | Early repayment with no prepayment charges | Limitation on early repayment with high penalties charges |
| Interest Rates | Comes with Higher Interest Rates | Offers Lower Interest Rates |
| Mortgage Terms | Offer shorter terms | Available in longer terms |
Variable Open vs Variable Closed Mortgage
When navigating the mortgage landscape, understanding the intricacies of variable rate mortgages is essential. Within the categories of open and closed mortgages, there are also variable-rate options available. Variable open and variable closed mortgages are two distinct types of mortgages that feature interest rates that fluctuate with the market. Let’s understand these terms in detail:
Variable Open Mortgage: This type of mortgage can be changes based on prime lending rate, and it offers the borrower significant flexibility in terms of repayment. The interest rate on a variable open mortgage is tied to the prime rate, which means it can go up or down depending on market conditions. This can result in lower monthly payments if rates decrease.
Variable Closed Mortgage: This mortgage also features an interest rate that changes with the prime rate, but it comes with restrictions typical of closed mortgages, meaning you have limited flexibility to make additional payments without penalties.
Making the Right Choice: Open vs Closed Mortgage
Choosing between an open and closed mortgage depends on your financial situation and plans in nearby future. Here are some scenarios to consider:
When to Choose an Open Mortgage
- Expecting a Windfall: If you expecting to receive extra cash soon, such as money from inheritance, or proceeds from a sale, an open mortgage allows you to pay sum lump amount of loan without penalties.
- Planning to Move: If you might relocate or sell your home in the near future, an open mortgage provides the flexibility on repayments without penalties.
- Uncertain Income: If your income is variable or you expect significant changes, the flexibility of an open mortgage can be advantageous.
When to Choose a Closed Mortgage
- Stable Long-Term Plans: If you plan to stay in your home for the duration of the mortgage term, a closed mortgage with lower interest rates can save you money over time.
- Budgeting Needs: The predictable payments of a closed mortgage make it easier to budget and manage your finances.
- Interest Rate Environment: In a low-interest-rate environment, locking in a closed mortgage can protect you from potential rate increases.
The Bottom Line
Choosing between an open and closed mortgage is an important decision that can notably impact your financial future. Understanding the key differences and benefits of each type, including the variable options, will empower you to make a right choice that fits with your financial goals.
When it comes to making the crucial decision for mortgage refinance or renewal, Turnedaway.ca can be an invaluable resource. With a team of experienced mortgage professionals, Turnedaway.ca offers personalized guidance to help you navigate the complexities of mortgage options. They understand that every financial situation is unique and provide tailored solutions to meet your needs.
Turnedaway.ca specializes in assisting individuals with varying financial backgrounds, ensuring that you have access to the best mortgage products available. Whether you’re considering an open or closed mortgage, or evaluating variable rate options, their expertise can help you make the most beneficial decision.
Don’t let the complexities of mortgage choices overwhelm you. Reach out to Turnedaway.ca for expert advice and support in finding the mortgage solution that suits your financial needs.
