Mortgage Blog
Open vs Closed Mortgages in Canada
March 29, 2022 | Posted by: Ronice Harrison
You have two options when it comes to your mortgage: either open or closed. Each one is designed with a specific borrower in mind, which is why you’ll need to decide for yourself which might suit you best.
Let’s consider the similarities and differences between open and closed mortgages to help you make the right choice.
Open vs Closed Mortgages in Canada
Both open and closed loans have their own advantages and disadvantages, so it’s important to understand what each mortgage type is and assess it based on your needs.
Closed Mortgages
Closed mortgages usually last 6 months to 10 years, and tend to have lower interest rates than open mortgages.
Closed mortgages are the most popular choice for homebuyers in Canada because they offer a longer time period within which to pay off their mortgage. They also come with fixed monthly mortgage payments, which makes budgeting easier.
Advantages Of A Closed-Term Mortgage
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Interest rates are lower.
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It’s a better choice if the borrower wants to pay off their loan faster.
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The cost of borrowing is cheaper because of lower interest rates.
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Lump-sum payments and increasing monthly payment amounts are possible.
Disadvantages Of A Closed Term Mortgage
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You generally cannot pay off your mortgage in full before your term ends without a penalty.
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Mortgage terms cannot be refinanced or renegotiated without a penalty.
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The terms are longer.
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Harder to break the mortgage loan, even if you want to sell your home.
Thinking of buying a home in Ontario? See our infographic for the cost of buying in Ontario’s biggest neighborhoods.
Open Mortgages
Open mortgages typically have shorter terms of 5 years or less, though the lender doesn’t have to hold the loan until it matures.
Unlike closed mortgages, open mortgages allow borrowers to fully repay the mortgage loan amount, renegotiate the terms, or refinance the loan at any time with no penalties.
Borrowers may find this option more attractive if they want a shorter-term loan, or if they believe they can pay extra towards the principal portion of their mortgage from time to time. By doing so, borrowers may be able to pay off their mortgage early!
However, the interest rate associated with open mortgages is usually higher than closed mortgages in exchange for greater flexibility.
Advantages Of An Open Mortgage
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The freedom and flexibility to pay what you want, when you want.
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You don’t need to worry about paying penalties if you decide to pay off the loan earlier or refinance.
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The term is shorter.
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You have more leverage to move your loan to a cheaper lender, or re-negotiate a better deal without paying fines.
Disadvantages Of An Open Mortgage
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Higher interest rates in exchange for flexibility.
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The cost of borrowing will tend to be higher because of the higher interest rate.
Interest Rates: Open Mortgages vs. Closed Mortgages
As mentioned, interest rates tend to be higher with an open mortgage than with a closed mortgage. But the exact rate you’re charged will also depend on whether you opted for a variable- or fixed-rate mortgage.
Learn more about variable and fixed interest rates in our quick and easy guide.
Which Mortgage Is Right For You?
Your decision to choose an open or closed mortgage should be based on your current financial situation, as well as where you see yourself in the future.
While flexibility might not be too important for some borrowers, it might be a must-have for others.
Consider An Open Mortgage If:
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You Want To Sell Your Home Sooner – Are you likely to sell your home in the next 5 years? An open mortgage will make sure you avoid any fines to repaying your mortgage early.
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You Expect to Receive a Large Sum of Money – If you know you’ll come across a large sum of money like a big bonus or an inheritance, you could use it to pay off your mortgage early. In that case, you should go with an open mortgage.
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Your Income Is Expected To Increase – If you anticipate a significant raise at work, you might be able to put more towards each mortgage payment. To be able to renegotiate your payments, go with an open mortgage.
Consider A Closed Mortgage If:
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You Plan On Settling Down – If you don’t plan to sell your home within the next 5 years, you don’t need the flexibility to break your mortgage early. In this case, it would make more sense to take out a closed mortgage to take advantage of a lower interest rate.
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No Financial Changes – You’re expecting your financial situation to remain as is. If you don’t expect your income to change or don’t have any inheritance money coming your way, a closed mortgage might be suitable for you.
Open Mortgage Vs. Closed Mortgage FAQs
What’s an IRD?
An IRD is an “interest rate differential” that represents the amount of interest your lender would lose if they offered you today’s rate after breaking your current contract. Lenders use this tool for compensation purposes if you choose to prepay your loan amount in full earlier than the mortgage maturity date.
What mortgage should I get if I expect to sell soon?
An open mortgage might be more suitable if you plan to sell your home soon. That way, you can break your mortgage early without incurring any prepayment penalty fees.
What is the Canadian Prime Rate?
The Prime Rate is the interest rate used by banks and lenders to establish the rates charged for various loan types, including variable-rate mortgages. When the prime rate changes, so does the interest you pay on a variable mortgage.
Want to know the current prime rate?
Bottom Line
There are clear benefits to both open and closed mortgages, but those perks only apply in certain scenarios. Assess your financial situation and where you foresee yourself in the near future before deciding which type of mortgage to apply for.
When you’re ready to start shopping for a home, learn why a mortgage pre-approval should be your first step!
Fill out our quick application form to get started and learn how much you could borrow today.
