Most people think that a fixed mortgage is closed and a variable mortgage is open, which is not true. The rate type, whether it’s fixed or variable, has nothing to do with whether a mortgage is open or closed.  Both fixed rates and variable rates can be closed or open. Unfortunately, the slang in the industry has contributed to the confusion. Hopefully this article will help you understand different types of mortgages so you can make better decisions in the future.

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Below, I will define the three types of mortgages in the market which will remove the confusion and give a clear indication of what you should look out for:

  1. Closed Mortgage:
    These are the most ominous mortgage types in the market. These mortgages cannot be broken even if the borrower wants to pay a penalty. They can only be broken upon the sale of the property or at the end of the term. These mortgage types can be fixed or variable

Caution: This clause is often hidden in lower than normal interest rates. Closed mortgages force the borrower to be loyal to the lender for the full term and the borrower pays an unfair price for a small benefit in return

Why choose a closed mortgage: There is no good reason to take a closed mortgage.

  1. Open Mortgage:
    These are the most flexible mortgage types. They can be broken any time and they also allow for unlimited payments to the principal; all without penalty. They can also be fixed or variable. Open mortgage rates are always higher than closed mortgage rates,  because they are flexible.

Caution: These mortgages are meant for transition periods and are not meant for the long term.  Thus, have a plan before you take a fully open mortgage.

Why choose a fully open mortgage: They are ideal for someone who is in transition, such as selling your home right after the mortgage term renews. Since secured lines of credit are interest only and fully open they are also great for cash flow.

  1. Partially open mortgage:
    What banks call “closed” mortgages are actually partially open mortgages. Partially open mortgages are what we all know. These are the everyday mortgages out there.  They are the healthiest mortgages in the market and can be fixed or variable

They are partially open because they allow you lots of privileges such as additional lump sum payments to the principal, increases and decreases to the regular payment, portability, assumability etc and you can break them if you are prepared to pay a penalty.

Caution: It is almost always about the best mortgage and not just the lowest rate. The best mortgage should include the best interest rate and terms and conditions for the long term. Thus, check the conditions attached to the interest rate!

Why choose a partially open mortgage: This should be your default mortgage since they allow you options that put you in control.

 


 

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