There are many different types of mortgage products and lenders out on the market, each with its own terms and stipulations. When it comes to mortgages specifically, you will always have a choice between two different types of loans – open or closed.

What is An Open Mortgage?

Open mortgages are more flexible than closed mortgages, in that you can pre-pay any amount towards principal and interest, without penalties. However, open mortgages come with higher interest rates to account for the flexible payment structure.

What is A Closed Mortgage?

Closed mortgages are more common as they have a more attractive interest rate. Closed mortgages set limitations on how much you can pay each year of your term before any penalties are assessed. Of course, these terms can vary widely depending on your individual situation, lender, etc. While you get a lower interest rate, once you hit a certain payment threshold (on average it is 15% of the original/current balance), you will be charged a pre-payment penalty.

Pros Vs Cons

Simply put, the major pro of an open mortgage is the ability to pay it off at your own pace. The con to that is you will need to pay higher interest.

The pro of a closed mortgage is the lower interest payments. The downside, you will face pre-payment penalties if you overpay your balance based on your terms.

Fixed And Variable interest rates

Secondary to open and closed mortgages, you can also consider whether your mortgage will be fixed or variable rate. A Fixed Mortgage Rate means your interest is set in stone for the duration of the term. A Variable Mortgage Rate means your interest fluctuates based on the prime rate over the duration of the mortgage term.

While most people choose a fixed rate, the best option for you is entirely dependent on your financial situation, the overall market, and risk tolerance. Of course, right now in Canada, the prime rate has seen steady raises before finally pausing last month. If you are on a variable rate, that’s a hard hit to your wallet in interest payment increases. On the other hand, if that rate starts coming down, those on variable-rate mortgages will start paying more toward principal than interest.

Variable rate terms are available in all increments, but often 3-year terms are most common. With fixed rate terms, you often see 5-year options as the most popular. When determining which term length for your mortgage, consider the ongoing market, how long you plan to remain in your home and be aware of your financial situation.

Conclusion

When choosing a mortgage, it is important to be aware of your financial situation, needs, goals, market conditions, and what products are available to you. To make your search easier, work with a licensed mortgage professional to help find you the best rates and terms and give you the right advice on your mortgage choice.