Who is this for?
If you have no plans to pay off your mortgage in the near future, a closed mortgage may be the right choice for you. That’s because closed mortgage rates are generally lower than open mortgage rates.
An open mortgage may be a better fit for you if you’d like to have the ability to pay your mortgage off before your term is up. When choosing a closed mortgage, you’re essentially telling your lender that you have no plans to pay off your mortgage in full, or more than prepayment privileges will allow.
How will this help me?
It’s simple: In most cases, a closed mortgage will offer a lower interest rate than an open mortgage, giving you the opportunity to pay less in interest over the course of your mortgage term.
If you don’t mind taking a slow but steady approach to paying your mortgage, then the lower interest rates available through a closed mortgage could make this the right type of mortgage for you.
What else do I need to know?
All lenders place limits on adjusting the payment terms of a closed mortgage. However, a “prepayment privilege” may allow you to pay down your mortgage sooner without having to pay a penalty.
Through a prepayment privilege, you can choose to increase your regular mortgage payments by a specified percentage or amount, make an annual lump-sum payment up to a certain percentage towards the principal of the mortgage amount, or double up on your scheduled regular payments. Be sure to ask your lender if they allow you to make prepayments and what amount (or percentage) can be added to your regular mortgage payments.*
Interest rate differential
Your lender may use what’s known as an interest rate differential (or IRD) to determine your penalty for moving to a lower fixed rate. Put simply, the IRD is the difference between the rate you currently have on your mortgage and the lower rate that you’re hoping to get.
Sometimes, rather than use the IRD, lenders may choose to charge you three months’ interest as a penalty. When deciding which method to use for determining a penalty, lenders will generally choose the calculation that generates the greatest return.
* It may also be wise to ask your lender how selling the property and/or transferring payments to a new property affect your payment schedule.
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