It’s good to know as much as you possibly can about your mortgage before you sign the agreement. You don’t want there to be any surprises and having a basic knowledge of the different types of mortgages can help you feel more secure in the overall process. Knowing that there are different types of mortgages that can suit your needs is important, and choosing the right one for you is important as well. Here are some differences between open and closed mortgages.
Differences Between an Open Mortgage and Closed Mortgage
An open mortgage is basically a mortgage that has no rules. With an open mortgage, you can pay back what you own at any time. You could buy a house in September, and sell it in December with no penalty of breaking the term. This can be beneficial to many different individuals, especially those who travel often or those who love to restore buildings before selling them again.
A closed mortgage, as the name may suggest has some rules put in place. In a closed mortgage, you are agreeing to a term. With agreeing to a term, it means if you back out before the term is up, you will have to pay a penalty. These penalties can come as quite the shocker. The penalty is typically three months of interest, or the Interest Rate Differential (IRD) depending on which one is MORE (but variable rate mortgages don’t have the IRD). So we take a mortgage balance of 500k with a 30-month term remaining, an initial fixed interest rate of 5.70% vying for the current variable interest rates of 1.95%, which means the penalty would be around $46,000. So as you can see with a closed mortgage it is easy to have expensive penalties. It is definitely something to take into consideration when choosing the type of mortgage you want.
Let’s say you run into some money, you win the lottery and want to just pay off your term because you have money. You can’t do that with a closed mortgage. You will get a penalty for that. You will also have a penalty for refinancing. So if you had a fixed rate and thought about refinancing to get a better rate by going with a variable rate, you definitely could do that, but it will cost you! It’s important for you to speak with a Mortgage Broker or with your bank to figure out which will be the most beneficial to you and your financial future.
So after stating all these points, you wonder, why would you get a closed mortgage? Well, an open mortgage does charge you more interest. Ah, so there’s the catch! So that’s another thing to think about when you are looking at getting a mortgage.
If you would like to know your mortgage options, have any questions or would like to know if the mortgage you have now is the perfect one for your lifestyle, please speak to one of our professional mortgage brokers at Team Jardine.