What is a “closed” or “open” mortgage?

When you are shopping for a mortgage, you may hear the terms, CLOSED or OPEN mortgage.    Let me explain the difference between these two options so you can determine which one is better for you.

OPEN MORTGAGE An “open” mortgage means that the mortgagor (the borrower) can pay the mortgage off, fully, at any time, without a mortgage penalty.   A fully open mortgage is suitable for the following types of borrowers:

a) a property investor buys a property and has intention of selling it in a very short timeframe;

b) a borrower sets up this mortgage because they are expecting a large sum of money (for example, an inheritance or a work bonus) and will use that money to pay off the full mortgage loan amount;

c) a borrower who might be required to move on notice (perhaps due to a work relocation requirement) and would need to pay the mortgage off in full when the house sells.

d) you receive regular large bonus amounts, as an employee of your company, and you wish to apply these amounts to your mortgage anytime without the restrictions that might come on a lender’s regular pre-payment terms.

e)  or perhaps you do not want to be locked into any term, for your mortgage loan.

Note that, the mortgage rates, for fully OPEN mortgages are higher than those given for  “closed” mortgages.   For example, effective today November 24, 2009, a fully open variable mortgage rate, is available at Prime Rate Plus 0.80% = 3.05%

CLOSED MORTGAGE A closed mortgage means that the mortgagor (the borrower) is given a contract “term”.     If the borrower breaks the mortgage, before that contract term is up (known as the renewal date), the borrower must pay the mortgagee (lender) a full three months of interest penalty to get out of the contract (or IRD penalty).    Variable mortgage contract terms are available for 3 year terms and 5 year terms, right now.   A closed variable, 5 year term, mortgage rate is priced right now at between Prime Rate Minus 0.10% = 2.15% up to Prime Rate Plus 0.10% = 2.25%.   A closed variable, 3 year term, mortgage rate is priced at Prime Rate Minus 0.25% = 2.00%.

So you can see that there are specific reasons why a borrower would choose a closed mortgage over an open mortgage.

This post was written by Elizabeth Blair on November 24, 2009, a Licensed Mortgage Agent with Mortgage Edge in Richmond Hill, Ontario.  Elizabeth services mortgage clients all over the Greater Toronto Area.

You can contact Elizabeth by phone:  (905) 510-5785

Or email:    eblair@mortgageedge.ca

Visit her website at:     http://www.missmortgage.ca

Elizabeth Blair is licensed with the Financial Services Commission of Ontario and is also a Member of IMBA (the Independent Mortgage Brokers Association of Ontario) http://www.imba.ca

Lic # M08005880 / Brokerage Lic # 10680

Head office is located at:     15 Wertheim Court, Suite 210, Richmond Hill, Ontario, L4B 3H7