Many prospective home buyers have heard what Fixed and Variable means, but many have not heard the terms "Open vs. Closed" before. We are here to help explain what that means.
What is an open mortgage?
An open mortgage enables a borrower to repay their mortgage, in part or whole, at any time without any penalties or notice. Open mortgages are useful if a home buyer knows that they will be moving out within a short period of time, or if they are coming into a large amount of money from a home sale or inheritance and wants to pay off their mortgage quickly. It is important to note, however, that open mortgages generally come with much higher interest rates than closed mortgages.
What is a closed mortgage?
These are mortgages that cannot be repaid in full before the end of the borrower’s term without a penalty. There are also open mortgages, which provide borrowers with the ability to repay their mortgage at any time without incurring a penalty; however, an open mortgage usually comes with a higher interest rate compared to a closed mortgage.
Why get an open mortgage?
You are flipping the house you purchased
You need a short-term mortgage
You are only going to live in the home for a short period of time
You are coming into a large sum of money (i.e. from an inheritance)
Why get a closed mortgage?
Longer term buyer who would like a lower rate
You can still have prepayment options of up to 20%
You are the average home buyer that is looking to save money on their mortgage
What do most people do?
By far, most home buyers go with a closed mortgage.