Mortgages are one of the largest financial commitments most Canadians ever make and understanding the pros and cons of open and closed mortgages is critical for making the right choice. Knowing which type of mortgage best suits your needs is important for ensuring you get the most out of your investment.
Open Mortgages
Open mortgages are the most flexible type of mortgage available in Canada. They have no pre-payment or penalty limits, allowing borrowers to make additional payments, pay off their mortgage in full, or break their mortgage at any time with no penalty. This makes open mortgages a great option for those who expect to receive a large bonus or inheritance, or who want the freedom to make extra payments if they have the funds available.
Pros
• No penalty for early repayment.
• Flexibility to make additional payments.
• Break the mortgage at any time.
Cons
• Generally, open mortgages have higher interest rates than closed mortgages.
• Extra payments are not required, so borrowers may not take advantage of the flexibility.
• Unforeseen life events may make it difficult to pay off the mortgage in full.
Closed Mortgages
Closed mortgages are the most common type of mortgage in Canada and are typically the best choice for those who plan to keep their mortgage for the full term. Unlike open mortgages, closed mortgages have pre-payment and penalty limits, and breaking the mortgage before the term is up will result in a penalty. Closed mortgages have lower interest rates than open mortgages, making them an attractive option for those looking to save money over the long term.
Pros
• Generally, closed mortgages have lower interest rates than open mortgages.
• Borrowers can take advantage of pre-payment privileges.
• Borrowers can lock in a fixed rate for the mortgage term.
Cons
• Breaking a closed mortgage before the term is up results in a penalty.
• Borrowers may not be able to make additional payments if their financial situation changes.
• Borrowers may have to pay a penalty if they pay off their mortgage before the term is up.
Ultimately, the choice between an open or closed mortgage will depend on the individual and their financial situation. Those who expect to receive a large bonus or inheritance, or who want the flexibility to make extra payments, may prefer an open mortgage. On the other hand, those who plan to keep their mortgage for the full term and want to lock in a low interest rate may prefer a closed mortgage.