Understanding Open Mortgages in Canada – Benefits and Drawbacks
When it comes to buying a home in Canada, choosing the right mortgage is essential. One option available to homebuyers is an open mortgage. This article will explain what an open mortgage is, its benefits and drawbacks, and who it is best suited for.
What is an Open Mortgage?
An open mortgage is a type of mortgage that allows borrowers to make extra payments or pay off their mortgage in full before the end of the term without facing any prepayment penalties. This type of mortgage offers borrowers greater flexibility and can be useful for those who expect to receive a lump sum of money, such as an inheritance or bonus, that they can use to pay off their mortgage.
Benefits of an Open Mortgage
There are several benefits associated with open mortgages, including:
- Flexibility: Open mortgages offer borrowers the flexibility to make extra payments or pay off their mortgage in full without incurring any penalties.
- No Prepayment Penalties: Unlike closed mortgages, open mortgages do not have prepayment penalties. This means that borrowers can pay off their mortgage faster without incurring additional costs.
- Refinancing: Borrowers with an open mortgage can easily refinance their mortgage to take advantage of lower interest rates or to access the equity in their home.
Drawbacks of an Open Mortgage
While open mortgages offer many benefits, there are also some drawbacks, including:
- Higher Interest Rates: Open mortgages typically come with higher interest rates than closed mortgages. This is because lenders are taking on more risk by allowing borrowers to pay off their mortgage at any time without penalty.
- Fees: Although open mortgages do not have prepayment penalties, they may have other fees associated with them. For example, lenders may charge fees for making extra payments or refinancing the mortgage.
- Limited Term Options: Open mortgages typically have shorter terms than closed mortgages, which may not be suitable for borrowers who prefer long-term stability.
Who is an Open Mortgage Best Suited For?
An open mortgage is best suited for borrowers who have the financial flexibility to make additional payments or pay off their mortgage early without incurring any prepayment penalties. This type of mortgage is ideal for borrowers who have a variable income, receive bonuses, or have other sources of income that they can use to pay off their mortgage faster.
Open mortgages are also suitable for borrowers who plan to sell their home in the near future or are expecting a large influx of cash, such as an inheritance or settlement, which they can use to pay off their mortgage.
However, it’s important to note that open mortgages typically come with higher interest rates than closed mortgages, so borrowers should be prepared to pay a higher interest rate in exchange for the flexibility to make additional payments or pay off their mortgage early.
Overall, an open mortgage is a good option for financially flexible borrowers who are comfortable with a higher interest rate and want the ability to pay off their mortgage faster without incurring prepayment penalties.
An open mortgage may not be the best option for every borrower. It is not suited for those who prioritize long-term stability and certainty in their mortgage payments. Specifically, open mortgages may not be suitable for:
- Borrowers with a fixed income: If you have a fixed income and are not able to make extra payments, an open mortgage may not be the best option for you. In this case, a closed mortgage may be a better option as it typically has a lower interest rate and a set payment schedule, providing stability and predictability.
- Borrowers with a low-risk tolerance: If you prefer a more conservative approach to your finances, an open mortgage may not be the best option for you. This is because the higher interest rate associated with an open mortgage carries a higher level of risk compared to a closed mortgage.
- Borrowers with a long-term outlook: If you plan on living in your home for a long time and value long-term stability in your mortgage payments, a closed mortgage may be a better option. Closed mortgages typically have longer terms and lower interest rates, providing a sense of stability over the long term.
- Borrowers on a tight budget: If you have limited financial flexibility and cannot afford to make extra payments, an open mortgage may not be the best option for you. The higher interest rate associated with an open mortgage may increase your monthly mortgage payments, making it difficult to manage your budget.
Overall, while an open mortgage can be a good option for some borrowers, it is not suited for those who prioritize long-term stability, have a low-risk tolerance, have limited financial flexibility, or have a fixed income. It’s important to carefully consider your financial situation and goals before deciding on which type of mortgage is right for you.
An open mortgage can provide flexibility for borrowers who have the financial means to make additional payments or pay off their mortgage early. However, it’s important to carefully consider the benefits and drawbacks before deciding if an open mortgage is right for you. Ultimately, the best mortgage option will depend on your individual financial situation and goals. A mortgage broker or financial advisor can help explain the differences in mortgage products and help you decide which would be a better fit.
For more information on Open Mortgages call 416-912-6200