What is the difference between an open mortgage and a closed mortgage? Which one is right for me?

Author: Sleep Easy Financial |

Generally, an open mortgage gives you the most flexibility in making extra payments towards your mortgage principal and even allows you to pay off your mortgage balance entirely at your discretion. However, this flexibility comes at a cost to the borrower in terms of a higher interest rate.

In contrast, a closed mortgage offers little to no privileges in paying off your mortgage early. You cannot pay off your mortgage without attracting penalties, referred to as prepayment penalties. Note of caution - not all closed mortgages are created equal. It is best to check with your licensed mortgage professional as to how your prepayment penalties are calculated. The difference between how one lender calculates the penalty compared to another lender can be significant (tens of thousands of dollars)!

Choosing between an open or closed mortgage is dependent upon your personal circumstances and outlook over the term of the mortgage. If you have uncertainty in your life such as a serious illness, a looming separation, or a possible job transfer to another city, it is better to opt for an open mortgage. Doing so can save you thousands of dollars by avoiding the high prepayment penalties associated with closed mortgages. Another note of caution - not all open mortgages are created equally either. Always check with your licensed mortgage professional to see just how 'open' your mortgage really is.


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