If you clicked on this blog, then you must be considering buying a new property. Congrats! Because this is such an important decision, it is ok to feel confused. A mortgage is never one-size-fits-all, on the contrary, there are many factors that play into choosing the right type for you. In this blog, you will learn about the difference between open and closed mortgages and how to choose what works best for your specific scenario.
A closed mortgage is one of the most restrictive. It cannot be fully paid off, renegotiated, or refinanced after you sign on the dotted line, without inducing a penalty. When choosing a closed mortgage, you are committing to pay a certain sum of money every period of time. If you want to prepay earlier than the end of your term, you’ll have to pay a prepayment penalty, which can be quite expensive.
An open mortgage can be fully repaid, renegotiated, or refinanced at any point in time and with no penalties. Although this type does have a term, you do not have to hold it until its maturity. If you receive any windfall money, you are able to pay it off early and save interest that you would otherwise have to pay. However, open mortgages have a way higher interest rate compared to a closed one.
Which is Best For you
From reading about it, having a flexible mortgage policy where you can change your monthly payment according to your income and financial comfort does sound very tempting. However, it is unnecessary if you are not expecting any income influx (bonus, divorce settlement, inheritance, etc). When making up your mind, you have to weigh the flexibility of the open mortgage against its high interest rate. When deciding, as yourself the following questions:
- Are you able to make payments each month?
- Do you think you will be in a situation where you can pay earlier than the end of your term?
- Can you still afford your monthly expenses along with your mortgage loan?
- Do you plan on selling your property before the mortgage’s end date?
This is a huge financial commitment, make sure you know what you are getting yourself into before it’s too late. Research all your options, ask your expert friends, and if you need to, do not be hesitant to speak to a licensed mortgage broker for guidance.