Open Mortgages vs Closed Mortgages
With an open mortgage, you’re able to prepay any amount of your mortgage at any time without facing a prepayment penalty. The compromise for having an open mortgage is that interest rates are higher to make up for the flexibility of being able to pay it off at any time.
With a closed mortgage, on the other hand, the interest rate is more attractive than a closed mortgage because you’re limited by how much extra you can pay towards your mortgage each year. So, the compromise here is that you’ll face a prepayment limit. This means that you’re only permitted to pay a certain percentage of your original or current balance per year – often 15%, on average, but this varies between lenders. If you have the choice, be sure to always opt for the original balance prepayment option as it will enable you to pay off more in a year. And if you choose to pay more than your annual limit, you’ll receive a prepayment penalty. It’s important, therefore, to be aware of your limits and stay within them.
Variable Mortgage Rates vs Fixed Mortgage Rates
A variable-rate mortgage fluctuates with the lender’s prime rate throughout your mortgage term. While your mortgage payment will remain the same throughout your term, your interest rate may change based on market conditions. So, if the prime rate rises or falls, this impacts the amount of principal you pay off each month. When rates on variable-rate mortgages drop, more of your payment is applied to your principal balance. And, conversely, if rates increase, more of your payment will go towards the interest portion of your mortgage.
A fixed-rate mortgage keeps your interest rate steady over the term of your mortgage. Historically, variable rates have paid off for Canadians over time, as a variable-rate mortgage often allows you to take advantage of lower rates as the interest rate is calculated on an ongoing basis at a lender’s prime rate minus a set percentage. Still, many conservative borrowers would rather pay more for the security of a fixed rate option than have to worry about the fluctuation of a variate rate alternative.
There’s no doubt that the five-year fixed-rate mortgage is the most common choice selected by Canadian homeowners. But, this isn’t the best option for everyone, regardless of its popularity. Your decision should be based on your tolerance for risk as well as your ability to withstand increases in mortgage payments. This is where our expert support is even more invaluable.
What are Prepayment Options?
Prepayment privileges enable you to make extra payments each year up to a certain amount based on your lender’s specific rules. It’s a great option to have because every dollar you pay towards the principal balance of your mortgage reduces the overall interest you’ll pay. This can shave a lot of time off the number of years it’ll take you to become mortgage free
There are a number of ways you can take advantage of prepayments, including:
- Lump-sum payments – Use work bonuses, inheritances or extra savings to your advantage
- Payment schedule – Switch your payment frequency to accelerated bi-weekly mortgage payments. With this option, you’re making one additional monthly payment per year, which can really add up over time
- Increase regular payments – Rounding up your regular mortgage payments even a few dollars each cycle can help your balance decline sooner
What’s a Mortgage Rate Hold?
If you’re planning to buy property in the near future, it’s a wise choice to request that nesto secure a rate hold on your behalf so you don’t have to worry about interest rates rising while you’re home shopping.
Ensuring you have a rate hold in place is like having insurance on your mortgage rate – you no longer have to worry about mortgage rates increasing while you find your new home over the next 90-120 days.
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