What is a Closed Mortgage and How Does it Work?
While most Canadians are aware of the difference between a fixed and variable rate mortgage, not as many of us are aware of the differences between an open and closed mortgage.
If you’re a homeowner with a mortgage, chances are pretty good that it’s a closed mortgage. Open mortgages just aren’t that popular in Canada. When you go to the bank to inquire about mortgage options, the bank probably will only present you with closed mortgages. In most instances closed mortgages make the most sense.
As its name suggests, a closed mortgage comes with restrictions. It has restrictions in terms of how much you can pay off during your mortgage term. With an open mortgage, you can pay off your mortgage in full during your mortgage term. This comes in handy if you’re expecting a huge inheritance or if you’re lucky and win the lottery. Not so with a closed mortgage. You’d likely face a costly penalty if you paid off your mortgage early.
You’re probably wondering why anyone would anyone choose a closed mortgage over an open one. The main reason is to save money. Closed mortgages typically come at a lower interest rate than open mortgages. So unless you expect a huge cash windfall, you should almost always go with a closed mortgage over an open mortgage.
Closed mortgage tend to come with a lot more term options than open mortgages. You may be able to choose a closed mortgage at a term length of one year, two years, three years, four years, five years and 10 years, whereby you may only have a single term to choose from for an open mortgage.