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The Advantages and Disadvantages of Open and Closed Mortgages in Mississauga

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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 mortgage is.
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 specialist can help you make an educated and informed decision.


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