What You Need To Know About Open & Closed Mortgages?

2020-10-07 | 07:43:24

Whether you are purchasing a home or refinancing there are many things to consider beyond the lowest interest rate when getting a mortgage. Of course, you want to get the best interest rate that you can possibly, as it can save you thousands of dollars over time in interest payments. However, many mortgagors looking for the lowest possible interest rate, may not understand that the lowest rate often means you are entering a closed mortgage that may have some prepayment privileges, but also severe prepayment penalties if your need or want to pay down or pay off your mortgage prior to the end of the agreed term. An open mortgage does allow the most flexibility to pay down or off your mortgage earlier and without penalty. For example if you knew you were going to want to sell your house in two years or reduce the mortgage significantly. However, you will also pay higher interest rates with a fully open mortgage.

With a closed mortgage prepayment privileges and penalties vary depending on your type of mortgage and the lender. If you have a closed mortgage you may have to pay prepayment penalties for selling your home before the end of term (breaking the contract); refinancing to get lower rates or a line of credit for renovations or to consolidate debt; or, paying more than permitted in a lump sum or in more frequent payments than your prepayment privileges allow.

Although prepayment penalties vary from lender to lender, they are often based on the higher of 3 months interest on what you still owe or the IRD (interest rate differential). The interest rate differential is the difference between the interest rate on your current mortgage term and today’s interest rate for a term that is the same length as the remaining time left on your current term. However, the IRD is calculated differently from lender to lender and based on your mortgage contract. The big caveat being that if you negotiated a discounted mortgage rate the lender, and outlined in the mortgage contract, may calculate the IRD in number of ways:

• the advertised interest rate at the time you signed your mortgage and the current posted rate for your term
• your actual discounted interest rate and apply the discount to the current interest rate
• your discounted interest rate for your current term and the advertised interest rate at the time the calculation is made

How these penalties are calculated can make a massive difference in the size of the penalty, and end up being a huge shock for mortgagors. Upfront, you may have thought you were getting the lowest mortgage rate possible, but the interest savings compared the penalties to pay off early may not be beneficial over the term of your mortgage. Hence, it is smart to work with a trusted, mortgage specialist that will take the time to explain these options, so that you can make the proper decisions based on your life and financial plans.

If you would like to discuss breaking your mortgage for a lower mortgage rate and better cash flow while saving money long term, please give me a call to do a free no obligation mortgage review. It would be my pleasure to assist you.For mortgage and refinancing information and advice, call Shelley Middlebrook at 647-997-3866 or email me at shelley@rightpathmortgage.ca