Open, Closed and Convertible Mortgage Basics – Ask Bruce Coleman, Vancouver Mortgage Broker
Canadian Mortgage News
CMI 101 Series
Dreyer Group 101 Series
Financial FYI Series
First Time Buyers
Home Buying 101
Open, Closed and Convertible Mortgage Basics
Choosing the right type of mortgage for your particular circumstances can be daunting. Asides from choosing between a fixed versus a variable mortgage you also have to decide on the length of the term and the amortization period for your mortgage. Every decision you make can mean the difference of thousands of dollars over the life of the mortgage.
If that wasn’t a tough enough decision to make, you also have to decide between an “Open” mortgage, a “Closed” or “Convertible” mortgage which is the focus of this article. What’s the difference and how do you decide which is the best choice?
What is an Open Mortgage?
An open mortgage is simply a mortgage which can be repaid either partially or in full during the term of the mortgage. The additional amounts you re-pay can be done so without pre-payment costs.
Such pre-payment features allow you to significantly reduce the mortgage principal. Open mortgages may also allow the additional flexibility of changing your term and without having to pay an additional fee.
These are usually the most suitable types of mortgages for those who plan to pay off their mortgage fairly early, or as soon as possible. The one drawback is that interest rates tend to slightly higher for these types of mortgages.
What is a Closed Mortgage?
For those of you who are don’t foresee your paying off the mortgage in near future then a closed mortgage might be a better option. Generally, these types of mortgages allow you to get a lower interest rate over the life of the term or mortgage.
The biggest disadvantage is that you want to renegotiate the interest rate, or make an additional prepayment, or to pay off the remaining mortgage balance, you will have to pay additional fees which can vary from lender to lender.
Most lenders allow you make a prepayment up to a percentage amount which may be as high as 20% of the value of the original mortgage.
What is a Convertible Mortgage?
A convertible mortgage is very similar to a closed mortgage. However, like the name implies, it also gives you the additional feature of converting an open mortgage to a much longer closed mortgage without having to make any prepayment fees.
Additionally you will still to able to make additional prepayment fees but the overall percentage amount may not be as high as a closed mortgage. You could be restricted to a percentage as high as 10% as of the original mortgage amount.
Which Type of Mortgage is Best?
It really depends on you current circumstances versus what you anticipate on doing over both the short term or long term. It can also very much depend on whether you choose between a fixed term or a variable term.
For most people who don’t anticipate paying off the home sooner or making really large prepayments, and who prefer a lower rate of interest, you might be more comfortable with a closed mortgage.
If you’re not certain which way to go, then you might be best advised to discuss your options with a mortgage specialist such as myself so I give you a better idea of the pros and cons as it relates not only to your situation but also for different lenders.