- What is the difference between open and closed mortgages?
- Which one is best for me?
- Is open mortgage ever beneficial?
- Which closed mortgage one should choose?
- If I did not know about Open/Closed mortgage terms and signed application, what are the penalties that can be imposed upon me?
Before signing a mortgage contract, one must be familiar with term Open/Closed Mortgage. Mortgage can either be fully Open or fully Closed or something in between the two ends.
Term Open Mortgage actually means how much of the principal can be paid either in part or full at any time or at a given schedule with or with penalty specified in the contract.
Term Closed Mortgage means borrower has no right at all to prepay the mortgage and all mortgages are virtually closed until and unless prepayment clause is specified right in the mortgage. But one should keep in mind that all mortgages become fully open automatically upon their maturity and can be paid off partially or fully without having to pay any penalty.
You must read the Open mortgage clause yourself; don't rely upon mortgage advisor or any other person involved because they don't work for you. Even if lender mentions that policy includes one of the prepayment features is not good enough; dig into it yourself.
There are three possibilities:
- Fully open (no penalty or notice required): This is the best type one can get but borrower should know that it carries higher interest rate than fully closed mortgage (additional 0.5% or more). Entire pricipal can be paid off partially/fully any time without any penalty and no notice is required either.
- Fully closed (lender has all control): Worst of all types in which borrower has no right at all to prepay any portion of principal. In this situation, lender controls everything and if he allows to be prepaid and with whatever conditions those must be honored by borrower. Borrower is completely at the mercy of lender. This type of mortgage should not be signed even if the interest rate is little lower than that of fully open mortgage because circumstances usually change every few years and you may have to relocate or buy something else or you can not pay the mortgage at all because of the financial crunch. Always look ahead of now.
- Mix of open and closed (open portion can have no penalties and/or notice required or predetermined penalty and/or notice required): Usually fully open is best of all but if that is not possible then one should get the mortgage that allows as much prepayment as possible without any conditions/penalties attached. That means if you can get fully open with some predetermined penalty/notice, that is still better than any portion of it closed.
