The main difference between an open and closed mortgage is the freedom to pay off your mortgage with or without being penalized financially.
Open Mortgages can be paid off at any time without penalties. You can also make additional payments without penalties. Open mortgage terms range from 6 months to 5 years, and typically offer variable interest rates that fluctuate with the prime rate. There will still be a minor fee to discharge the mortgage when paying out the mortgage or transferring to another lender. Mortgage interest rates for open mortgages tend to be higher than they are for closed mortgages, because of the risk to the lender of potentially losing out on a return.
Closed Mortgages have a lower interest rate than an open mortgage. You cannot pay out a closed mortgage early without a penalty, but you can still pre-pay a percentage of your original principal balance each year; this percentage varies from lender to lender. Closed mortgage terms can range from 6 months to more than 10 years. This type of mortgage can only be renegotiated or refinanced before it matures according to its conditions. A closed mortgage is more stable due to its restrictive nature, which is why interest rates are lower than they are for open mortgages.
|Open Mortgages||Closed Mortgages|
|Differences in Mortgage Terms||Shorter periods||Longer periods|
|Pre-pay Penalties||None (with minor exceptions)||Yes|
|Refinance before maturity?||Yes (easy/free to refinance)||No (or limited to its terms)|
|Differences in Mortgage Rates||Higher||Lower|
Open vs. Closed: Which is Better For You?
Closed mortgages are usually a more popular product because of lower interest rates. Open mortgages give you freedom to make extra payments at any time or pay out the mortgage in its entirety without penalty. Whether open or closed, what’s best for you depends upon your actual needs. If you plan on moving or selling the home within the next year, then an open term may best suit your needs. If you will not be relocated by work and intend on staying in your home for at least five years, then a closed mortgage may better suit your needs. If you are unsure, give us a call. We’ll help you make an educated and informed decision.
Closed Mortgage Prepayment Penalties
If you choose to sell your home or refinance your home before the end of the term, you will have to pay a penalty to do so. This penalty will be the greater of three months’ interest penalty or Interest Rate Differential (IRD). The three months’ interest penalty is the next three months interest portion of your loan as one payment. Interest rate differential is calculated when today’s interest rate is below the interest rate contracted when you obtained your mortgage. To determine the amount of the penalty, the difference between the two rates is multiplied by your balance and then by the remainder of your term.