A closed mortgage trades flexibility for a lower rate: you may prepay only within set privileges, and leaving early triggers a penalty. An open mortgage lets you repay or leave at any time without penalty, at a noticeably higher rate. For most Edmonton borrowers, a closed mortgage with generous prepayment privileges is the sweet spot — if you actually read the privileges before signing. See fixed vs variable: payment, penalty and flexibility compared.
What prepayment privileges do closed mortgages include?
Two kinds, both lender-specific. Lump-sum privileges let you pay an extra percentage of the original balance each year — commonly in the range of 10% to 20% depending on the lender and product — without penalty. Payment-increase privileges let you raise your regular payment by a set percentage, which quietly shortens your amortization. Some products restrict both sharply in exchange for a slightly lower rate; those “no-frills” trade-offs are where borrowers get trapped, because the rate saving is small and the lost flexibility is permanent for the term. See using payment frequency and lump sums inside a closed term.
When is an open mortgage worth its higher rate?
When you know money is coming or a change is booked: a home you expect to sell within months, an estate settlement or inheritance arriving soon, a planned move for work, or a short bridge between situations where certainty of exit matters more than rate. Open terms are usually short — six months or one year — and are priced as flexibility products. Holding an open mortgage for years “just in case” is paying a premium every month for an exit you never use.
“She got everything done fast and found me a great rate too. Honestly, I felt really taken care of the whole time.” — Vince, Google review
Photo via Wikimedia Commons.
How should you choose?
Estimate honestly how much extra you will actually prepay — most borrowers use far less than their maximum privilege — then compare lenders on both rate and privilege percentages together. If a sale or refinance is even a possibility mid-term, also compare penalty formulas: on fixed mortgages the interest rate differential calculation varies widely between lenders, and that difference can exceed every other feature combined. This comparison is a standard part of a Mortgage Renewal Check — privileges and penalties, not just the rate on the letter. See the two penalty formulas, worked through.
Choosing between open, closed, and a low-rate restricted product? Call me at (780) 722-5621 and we will match the privileges to how you will really use the mortgage, or start with the Pre-Approval & Refinance Check.
By Travis Bannert, Realtor and Mortgage Broker
Travis Bannert, Mortgage Broker | Next Door Mortgages, BFL Dominion Lending Centres | (780) 722-5621 | nextdoormortgages.com