That Is Right For You

Open and closed mortgages, choose an amortization period and term, decide on fixed or variable interest rates and etc.

A mortgage is a loan to help you buy a home or other property. Mortgages have different features to meet different needs. Make sure you understand the options and features lenders offer you when you shop for a mortgage. This will help you choose a mortgage that best suits your needs.

Open and closed mortgages:

The main difference between open and closed mortgages is the amount of flexibility you have in making extra payments or paying off your mortgage completely. Putting extra money toward your mortgage is called a prepayment. Prepayments allow you to pay down your mortgage faster.

Open Mortgages

The interest rate is usually higher than on a closed mortgage with a comparable term length. This is because it allows more flexibility if you think you may extra money toward your mortgage on top of your regular payments.

Open term mortgages allow you to do the following at any time during your term without paying a penalty:

  • Put extra money toward your mortgage on top of your regular payments at any time
  • Pay off your mortgage completely before the end of the term
  • Renegotiate your mortgage before the end of your term
  • Break your contract to change lenders before the end of your term

Closed Mortgages

The interest rate on a closed mortgage is usually lower than on an open mortgage with a comparable term length. Closed term mortgages usually limit the amount of extra money you can put toward your mortgage each year on top of your regular payment without paying a penalty. Your mortgage contract includes a limit to the amount of extra money you may put toward your mortgage. Your lender calls this a prepayment privilege. Not all closed mortgages allow prepayment privileges. They vary from lender to lender. You may have to pay a penalty if you break your mortgage contract or change lenders.

You’ll generally be required to pay a prepayment penalty if:

  • You make a prepayment that is more than what your lender allows
  • You decide to break your mortgage contract

Good Choice

Choose an amortization period:

The amortization period is the length of time it takes to pay off a mortgage in full. The longer the amortization period, the lower your payments will be. Keep in mind that the longer you take to pay off your mortgage, the more you’ll pay in interest.
If your down payment is less than 20% of the purchase price of your home, the longest amortization you’re allowed is 25 years.

How amortization affects the amount of principal paid back and interest paid after five years:

Mortgage amount Amortization Monthly payment Total interest paid
(Assume a constant interest rate of 4%)
Amount of principal paid back after five years Percentage of your mortgage paid back after five years
$300,000 25 years $ 1,578 $173,418 $38,838 12%
$300,000 20 years $ 1,813 $135,057 $54,384 18%
$300,000 15 years $ 2,214 $98,541 $80,973 27%
$300,000 10 years $ 3,033 $63,919 $135,196 45%

Choose a term:

The mortgage term is the length of time your mortgage contract will be in effect. This includes everything your mortgage contract outlines, including the interest rate. Terms can range from just a few months to five years or longer.

At the end of each term, you’ll need to renew your mortgage. You’ll most likely require multiple terms to repay your mortgage in full. If you’re able to pay off your mortgage in full at the end of your term, you don’t need to renew your mortgage.

If you want to renegotiate your mortgage contract or pay off your mortgage before the end of the term, you may have to pay a prepayment penalty. The amount you’ll pay will depend on the type of mortgage you have and the terms and conditions of your mortgage contract.

When choosing the length of your term, you may want to consider:

  • If  You Plan on Moving

  • Do You Want to Have the Same Payment for a Longer Period of Time

Decide on fixed or variable interest rates:

Interest is the amount of money you’ll pay to a lender for borrowing money. When you apply for a mortgage, your lender may offer different options to calculate the interest you’ll pay on your loan.

Example: Choosing between variable and fixed interest rates

Suppose you’re buying a home and need a mortgage for $200,000.

You’re looking for a mortgage with the following:

  • a 25-year amortization period
  • a five-year term

Your lender offers you the following interest rates:

  • 3.5% for a variable interest rate, with adjustable payments, or
  • 4.0% for a fixed interest rate

To decide which interest rate you’ll choose, consider the different scenarios in Table below.

Over the life of the five-year term:

Scenario 1 Scenario 2 Scenario 3 Scenario 4
Interest rate Monthly payment Interest rate Monthly payment Interest rate Monthly payment Interest rate Monthly payment
Year 1: 4.0% $1,052 3.5% $999 3.5% $999 3.5% $999
Year 2: 4.0% $1,052 4.0% $1,050 4.5% $1,103 3.5% $999
Year 3: 4.0% $1,052 4.5% $1,101 5.5% $1,209 3.5% $999
Year 4: 4.0% $1,052 5.0% $1,152 6.5% $1,316 3.5% $999
Year 5: 4.0% $1,052 5.5% $1,202 7.5% $1,423 3.5% $999
Total payment over 5 year term $63,122 $66,044 $72,607 $59,912
Interest paid over 5 year term $37,230 $41,620 $50,830 $32,472
Mortgage Balance in 5 years $174,108 $175,576 $178,223 $172,560

Consider if you’re comfortable with the possibility of interest rates increasing. Decide if your budget could handle higher payments. If not, a fixed rate mortgage may be better for you.

A variable interest rate mortgage may be better for you if you’re comfortable with:

  • Your interest rate changing and you think there is a good chance interest rates may drop or stay the same

  • Your mortgage payments potentially changing

  • The need to follow interest rates closely if your mortgage has a convertibility option

Decide how often you’ll make payments:

When you make a mortgage payment, the money is split between interest and principal. Money is first put toward the interest, and then toward the principal. The principal is the amount you borrowed from the lender.

At the beginning of your mortgage term, most of your payments will go toward interest. The amount that you owe will only go down a little. As your mortgage balance decreases, more of your payment will go to the principal.

Payment frequency

Payment frequency refers to how often you make your mortgage payments. Your payment frequency is set when you and your lender first arrange your mortgage, but you may be able to change it.