Types of Mortgages Download Guide

Types of Mortgages

Open Vs Closed

Open: Describes the option to prepay without penalty allowing a borrower to make large lump sum payments or to pay off the entire mortgage, without incurring extra fees. This option generally comes with higher interest rates and shorter terms. This is a good option if you plan on selling your home soon, or need a short period of time to weigh your options before looking into a closed mortgage.

Closed: May be a set limit on the amount or frequency at which lump sum payments are allowed. Should you choose to pay off your mortgage before the end of term you will most likely be charged a penalty. As such, they are not a good option if you plan on moving in the near future. They do however, involve fixed payments allowing a homeowner to adjust to a new budget that now includes regular mortgage payments. Also, term are normally set for longer periods allowing for greater certainty when planning for the future.

Fixed Vs. Variable

Fixed: Describes an interest rate which will not change over the term of the mortgage. This is a good option when interest rates are low are expected to rise in the near future. It also gives a first time homeowner time to adjust to any change in budget that making mortgage payment may have changed.

Variable: Meaning that the interest rate being charged is changing based on the interest rate set by the Bank of Canada. This rate fluctuates based on market conditions. Your payments will, with few exceptions continue to stay the same however the amount you are paying will be distributed to the interest and principal in different amounts. If interest rates rise you will be paying off less of the original borrowed sum as more of your payment goes to interest. The opposite being true should interest rates drop. If you have a fair bit of flexibility in your budget this may be a good option as variable rates over the life of your mortgage often result in lower interest charged.