Types of Mortgages

Mortgages are available on a closed, open, or convertible basis and at fixed or variable rates. Your decision will ultimately reflect your short-term plans, your desire for longer-term security and whether you believe interest rates are going up or down.

Closed, Open and Convertible Mortgages

In a closed mortgage, the interest rate is locked in for the full term of the mortgage and, if you want to renegotiate the interest rate or pay off the balance before the end of the term, you will have to pay a discharge fee to the mortgage lender.

Closed mortgages are usually the better choice for purchasers who suspect that interest rates may be on the rise and for those who are not planning to move in the short term. Interest rates for closed mortgages are generally lower than for open mortgages. Closed mortgages are available for terms of 6 months to 10 years. First-time purchasers often choose this type of mortgage in the early years as they are more secure knowing exactly how much their mortgage payments will be over a certain period of time.

Open Mortgages offer greater flexibility than closed mortgages since they can be repaid either in part or in full at any time without discharge fees. Open mortgages are generally available in terms of 6 months or 1 year. Open mortgages are good options for purchasers who are planning to move in the immediate future or who believe that interest rates are going down. Interest rates for open mortgages are typically higher than for closed mortgages because of the added flexibility.

A convertible mortgage is a short term closed mortgage with a fixed interest rate that can be converted to a longer, closed mortgage at any time without penalty. If you think rates may change, this allows you the flexibility to choose the right time to lock in your rate.

Fixed-Rate Mortgages and Variable-Rate Mortgages

The interest rate for a fixed-rate mortgage is locked in for the full term of the mortgage. Payments are set in advance for the entire term, which provides purchasers with the security of knowing precisely how much their payments will be and how to budget accordingly. Fixed-rate mortgages may be either open or closed.

With a variable-rate mortgage, the amount of interest paid fluctuates with interest rates. For example, if the interest rates go down, more of the payment is applied to reduce the principal. However, if rates go up, more of the payment is applied to payment of interest. Variable-rate mortgages can be open or closed.

A variable-rate mortgage provides the purchaser with the flexibility to take advantage of falling interest rates. If the variable rate mortgage is open, the entire mortgage may be paid off without discharge fees.