Open Mortgages

Open mortgages usually range between 6 month and 1 year terms. This allows borrowers to repay all or part of the principle amount of their mortgage at any time without penalty. You usually have to pay a higher interest rate for this type of mortgage since it offers greater prepayment flexibility. This flexibility makes open mortgages ideal for homeowners who plan to sell in the near future or who want to wait for rates to drop before locking into a longer-term mortgage. Unfortunately, open mortgages expose homeowners to short-term interest rate fluctuations since the interest rate is reset at the end of each 6-month or one-year term. If rates are on an upswing, your mortgage payments will continue to climb. On the plus side, if the rates are going down, your payments will drop at each renewal. With this type of mortgage you are allowed to break the mortgage at any time and either switch lenders or lock into any other type of mortgage without penalty.

Closed Mortgages

Closed mortgages normally range from 1 to 5 years but can be as much as 10+ years. These types of mortgages have structured repayment schedules with specific amounts due on a weekly or monthly basis. They usually have the lowest interest rate available but cannot be prepaid or discharged before the end of the term without having to pay a significant penalty. Ideal for purchasers who need to lock in their mortgage costs for long-term cash-flow planning. While most closed mortgages have lower interest rates and pre-payment privileges such as 10% anniversary payments or monthly double-up payments, they do not have the complete repayment flexibility found in open mortgages.

Variable Mortgages

Variable mortgages usually range between 6 month and 1 year terms. With this type of mortgage the interest rate is directly linked to the money market rates and can fluctuate on a weekly or daily basis. While this is usually the best rate available, long-term upward swings in interest rates could be quite costly. On the plus side, long-term downward interest rate swings could mean large savings as your mortgage rate follows the market down. With fixed-rate mortgages, a predetermined amount of each monthly payment goes to the interest and the rest is applied to the principle. With a variable rate mortgage the monthly payments are still fixed but, as the interest rate goes up, more of the regular payment will be applied toward the interest. If the interest rate goes down, more of the regular payment will be applied toward the outstanding principal.

There are alternative mortgage products available that can combine different features from the above types of mortgages. Financial institutions may even be willing to customize one of their products in order to meet your specific needs. Call your bank or mortgage specialist for more detailed information.

Mortgage rates differ depending on which of the above types and terms of mortgage you choose.