Choosing your dream home is a major decision. So too is finding the right kind of mortgage. Understanding the difference between an open and closed mortgage, as well as a convertible mortgage means a difference in interest rates (which translates into more or less money in your pocket) and flexibility (how much you can pay toward the mortgage and when you can pay it off). Choosing between an open and closed mortgage will have a big impact on the length of the mortgage and your personal finances, that’s why it’s important to consult with a licensed mortgage broker.
What Is an Open Mortgage?
Compared to closed mortgages, open mortgages are more flexible. With an open mortgage, you can make a lump sum prepayment or, if finances permit, make accelerated payments to pay down the loan before the end of the amortization period (or term length), without facing a penalty.
That flexibility comes at a cost though. Open mortgages tend to have higher interest rates than a closed mortgage with a comparable amortization period. Again, interest rates are higher because you can make extra payments toward your mortgage on top of the regular payments.
With an open mortgage, you can also renegotiate the mortgage before the end of the term and break the contract to change lenders before the end of the term.
What Is a Closed Mortgage?
A closed mortgage has a lot more restrictions than an open mortgage. For example, with some closed mortgages you cannot pay it off before the term ends without paying a big penalty. Other closed mortgages have a prepayment limit; if you go over that limit, you are, once again, hit with harsh penalties.
A closed mortgage also means, once you sign on the dotted line, the deal is closed, and it’s very, very difficult to make any changes.
Why would a homeowner want a closed mortgage? Closed mortgages have lower interest rates than an open mortgage, because there are limits on how quickly you can pay the mortgage off. While some closed mortgages do allow you to make limited extra payments on a mortgage, it’s rare.
What Does “Convertible Mortgage” Mean?
A convertible mortgage is very different from an open mortgage and closed mortgage. Where an open mortgage and closed mortgage has more to do with the length of time it takes to pay off a mortgage, a convertible mortgage has to do with rates.
Every mortgage is, in theory, a convertible mortgage, meaning, a convertible mortgage starts as either an adjustable rate mortgage or a fixed rate mortgage.
With a fixed rate mortgage, the mortgage is locked in at an agreed upon rate for the life of the loan, usually five years. The benefit of a fixed rate is that you know what your mortgage payments are going to be, and you pay those rates even if interest rates skyrocket or fall.
With an adjustable rate mortgage, your mortgage payments are adjusted regularly. If rates go up, you pay more in interest.
With a convertible mortgage then, you can, as the name suggests, convert your mortgage from a variable to fixed rate mortgage, or vice versa (or another type of mortgage), after a set period of time.
Which One Is Right for You?
The main difference between an open mortgage and a closed mortgage is the flexibility you have in making extra payments or paying off the mortgage in its entirety. Paying down your mortgage more quickly means less money going to the bank in interest.
You may want to consider an open mortgage if:
- You hope to pay off the mortgage soon
- Are thinking of moving in the near term
- Think you will, from time-to-time, have extra money to put toward the mortgage
A closed mortgage might be a good option if:
- You plan to live in the home for the length of the mortgage term
- Don’t expect to have extra money to make additional payments
- Or, the limited prepayments offered by the mortgage are flexible enough
Why consider a convertible mortgage? Switching to a variable rate mortgage, fixed rate mortgage, or other type of mortgage could end up saving you tens of thousands of dollars over the term of the loan.
A convertible mortgage is worth considering if:
- You’re in an adjustable mortgage and interest rates are going up
- If you’re in a fixed mortgage and rates are lower than what you signed up for
- You have a closed mortgage and want to convert it into a longer, closed term without prepayment charges
Confused? Contact a Mortgage Broker
Financial terms related to mortgages can be confusing. Understanding the basics can mean the difference between getting a great mortgage with the best terms and deals or getting stuck with a financial product that ends up costing you in the end.
For an objective overview of your finances and the financial products best suited to your needs, contact an independent licensed mortgage broker.
Banks provide mortgages and hundreds of other financial products. And that’s part of the problem—they don’t specialize in any one area and may not be up-to-date on new policies and products. Moreover, they only try and sell you their own products, even if it’s not right for you.
A mortgage broker on the other hand, specializes in mortgages and is better equipped to meet your individual needs. How can a mortgage broker do that? Independent mortgage brokers have access to a number of different types of private lenders.
Some of those lenders can give you better rates or prepayments options on closed mortgages.
Best of all, when using a mortgage broker, they will negotiate the rates and terms of your mortgage or any other financial product with the lender on your behalf. With traditional banks and lenders, you’re responsible for negotiating the interest rates.
Canadalend.com, Helping You Secure a Mortgage
If you’re in the process of buying a home and need help determining if you should go with an open mortgage or closed mortgage with fixed or variable rates or if you’re a homeowner with a convertible mortgage, contact the mortgage experts at Canadalend.com.
The licensed mortgage professionals at Canadalend.com will help you find a mortgage with the best rates and terms, suited to your financial and lifestyle needs.