The Advantages and
Disadvantages of Open and Closed Mortgages in Mississauga
The various types of Mortgages in Mississauga can seem
confusing to homebuyers. With so many mortgage terms and products that are
available for borrowers in today’s market, it is no wonder that prospective
buyers get confused as to what mortgage products are best for them.
One of the decisions a borrower will have to make is a
choice between a closed term mortgage and an open term mortgage. As with all
financial products, there are advantages and disadvantages to choosing closed
or open term mortgages.
What Is a Closed Term Mortgage?
A closed mortgage agreement is a mortgage that cannot be
renegotiated, repaid or refinanced until the mortgage reaches maturity, except
as permitted in the mortgage agreement. If a homeowner wants to make any
changes to the mortgage, they will be subject to prepayment penalties.
What Is an Open Term Mortgage?
An open mortgage offers much more flexibility than a closed
mortgage. With an open mortgage, a homeowner is able to make prepayments at any
time. In some cases, a homeowner may be able to pay off the mortgage before the
end of the mortgage term, with no prepayment charges.
Advantages and Disadvantages of a
Closed Term Mortgage
- Closed mortgages typically come with a lower
initial mortgage rate than fully open mortgages. If a borrower does not intend
to sell the property in the foreseeable future and has no intention of
prepaying any portion of the mortgage above what is allowed in the agreement, a
closed mortgage makes financial sense. If you think the interest rate you are
offered is good, a closed mortgage will give you the stability of knowing your
rate will not increase for the duration of the term.
- The main disadvantage of a closed mortgage is
the lack of flexibility. If a homeowner wants to refinance a mortgage in order to
take advantage of lower interest rates, they will have to pay a penalty fee. If
the homeowner is expecting to be able to pay a lump sum towards the mortgage or
pay the mortgage off entirely before the end of the term, an open mortgage or a
line of credit may be a better choice.
Advantages and Disadvantages of an
Open Term Mortgage
- The main advantage of an open mortgage is the
flexibility it offers. Open mortgages are beneficial to homeowners with income
that varies. If a homeowner has saved money or inherited a lump sum, they are
able to apply it towards the mortgage without penalties. Open mortgages are
also best if a homeowner plans to sell the home in the near future.
- The flexibility of the open term mortgage allows
lenders to offer higher interest rates. Therefore, the cost of borrowing will
tend to be higher with an open term mortgage. Also, not all open mortgages are
created equal. Check with a mortgage consultant to see just how open your
Closed term mortgages are usually a more popular product
because of lower interest rates. Open term mortgages give the freedom to make
extra payments at any time or pay out the entire mortgage without penalty.
Whether you choose open or closed mortgages in Mississauga, what is best for
you will depend on your actual needs. If you are unsure which mortgage product
will work best for you, a mortgage
can help you make an educated and informed decision.