Open vs. Closed Mortgages – Which is Better?

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January 24, 2023

When it comes to paying off your mortgage, you will need to decide between an open or closed payment structure. Understanding the differences between these two structures is crucial for determining the optimal choice for your needs and preferences. That is why the lending experts at PHL Capital Corp have compiled some information on open vs. closed mortgages to help you determine which is better for your situation.

Read our list of common mortgage questions and answers.

What is an Open-Term Mortgage?

With an open-term mortgage, the entire balance can be paid off in part or in full at any time without incurring penalties. The mortgage contract can also be refinanced or renegotiated without penalty, making open mortgages an extremely flexible option. Open mortgage terms are usually shorter than closed terms, ranging from 6 months to 5 years in length. While open mortgages are far more flexible than closed mortgages, they also tend to have higher interest rates. This makes them less common throughout Canada when compared to closed-term mortgages, though they are often a more popular choice for those that are planning to pay off their mortgage in the near future.

What is a Closed-Term Mortgage?

With a closed-term mortgage, there will be fees or penalties applied if you wish to pay off a lump sum of the mortgage or pay off the entire balance. Penalties will also be applied in most cases if you wish to refinance or renegotiate your terms. While some lenders do offer limited prepayment privileges, these are typically capped at a low percentage value of the entire balance. While closed mortgages are far less flexible than open mortgages, they tend to have lower interest rates. This makes them a more popular choice throughout Canada, especially for first-time home buyers and those that are not close to paying off their balance yet.

Which is Right for You?

To summarize, an open mortgage offers greater flexibility and no prepayment penalties with higher interest rates while closed mortgages offer reduced flexibility with significant prepayment penalties and lower interest rates. Since each option has a distinct set of pros and cons, there are situations where one type of mortgage would be the better option over the other. Speaking with a professional can help you determine which option is best for your current situation, goals, and other considerations, ensuring that you are selecting the best possible solution.

To learn more about our lending solutions, get in touch with the team at PHL Capital Corp. We can be reached by phone at 604-579-0847 and will be happy to answer any questions you may have regarding mortgages or our application process.