The SAVVY Communiques

Open vs. Closed Mortgages

Open vs. Closed Mortgages: Which Option is Best For You?

Despite the abundance of information available online in regards to mortgages, there’s a lot of confusion around the different terms. We’re here to make it easier on you…

While fixed and variable mortgages refer to the way your interest rate is calculated and applied, open and closed mortgages refer to the flexibility you have in paying off your mortgage debt.

Our number one goal is to help you become mortgage free faster, and the choice between open and closed mortgages is an important factor for many to consider in this process. At the end of the day, we want to make sure you feel confident and comfortable in any financial decision you make.

So let’s break it down…

What’s an Open Mortgage?

An open mortgage can typically be paid off in full, at any time, without any penalty. It can be an appropriate choice for those who prioritize flexibility in their mortgage. Perhaps you’re planning to sell your home relatively soon, or you’re expecting to come into a large sum of money, which can be used to pay off your entire mortgage. If this is the case, an open mortgage may be the right fit for you.

What’s a Closed Mortgage?

With a closed mortgage, you are allowed to make limited, penalty-free lump-sum payments, and there is a penalty if your mortgage is repaid in full before the end of its term. Many Canadians prefer the simplicity of a basic closed mortgage with fixed interest payments. They’re relatively easy to understand and you don’t have to worry about any surprises.

Which Option is Best For You?

An open mortgage is tempting for borrowers who fear mortgage penalties, but this doesn’t mean it’s necessarily the best option. In fact, in many cases, a close variable-rate mortgage still ends up being a cheaper alternative. Not only are you getting a lower rate (with small payout penalties), you can still make lump-sum payments of at least 20% on your original mortgage balance every year with no penalty.

Here’s what it comes down to: using an open product (whether an open variable-rate mortgage or a line-of-credit loan) is most effective as very short-term financing, and if used for any other reason it can end up costing you a surprising amount of extra money.

Where Should You Go From Here?

The only way to know for sure what option is best for you is to take the next step and secure your mortgage application. By doing so, you’ll have access to our honest feedback, and you can count on us to cut through the jargon and provide expert advice.

We make the process really easy, too. Just follow the steps we’ve outlined at the link below and our team will get started right away on finding the best mortgage product for you.

How Much Can You Afford?

How Much Can You Afford to Invest In a Home?

Stretching your finances too thin can lead to unnecessary stress. Your mortgage is a tool that’s meant to support your financial goals, not hinder them. The key is to know your numbers and find a solution that works within your means.

Here are some factors to consider when determining how much you can afford to borrow for your mortgage:

1.Down Payment

The minimum down payment you can make in Canada is 5% of the first $500,000 and 10% of the amount above $500,000.

What if you are putting less than 20% down?

If you make a down payment of less than 20%, your mortgage is considered high-ratio. This means you’ll be required to:

  • Pay mortgage insurance premiums.
  • Choose a mortgage amortization period that’s no longer than 25 years.

How much does mortgage insurance cost?

The cost of your insurance payments will vary, depending on the size of your mortgage. You can choose between two insurers: Canada Mortgage and Housing Corporation (CMHC) or Genworth Canada.

What does mortgage insurance do?

Mortgage insurance is designed to protect the lender in cases where a borrow defaults. It can be paid in a lump sum upon closing, or in installments over the length of the mortgage.

What if you have a down payment of 20% or more?

A mortgage with a down payment of 20% or more is considered a conventional mortgage. This means you can:

  • Choose a mortgage amortization period of up to 35 years.
  • Avoid paying for additional insurance.

2.Closing Costs

Closing costs can add up to anywhere from 1.5 to 4% of the purchase price of a home. These are one-time transactions that commonly include: inspection fees, realtor fees, lawyer fees, and land transfer tax.

3.Additional Ongoing Costs

Of course, becoming a home-owner means incurring a range of ongoing costs that must be considered separately from the purchase price and closing costs involved. Common additional costs include: home insurance, payment protection insurance, strata fees (monthly fees paid on the purchase of a condo), utility fees (such as hydro and water), and property tax.

How to Calculate What You Can Afford

Once you’ve considered all of the factors involved, you can compare these numbers to your income to determine exactly how much you can afford to borrow. Here’s how:

 

Why You Should Run the Numbers with Us

No matter what situation you’re in, it’s a good idea to run through your numbers with one of our mortgage specialists. Together, we’ll help you determine your closing costs and prepare you for the financial transaction you are planning to make.

 

At Mortgage Savvy, we would never put you in a situation we wouldn’t want for our own family members. No matter your financial background, we’re here to offer sound advice and guide you through the decision-making process.

Fixed vs. Variable

Fixed vs. Variable Mortgage Rates: Which Is Best For You?

Selecting your rate is one of the first steps to achieving your dreams of financial freedom.

There are many factors involved when shopping for your mortgage. Of course, rates are top of mind for everyone involved, but the lowest rate isn’t always the most important factor.

Here’s what you should know about fixed and variable rates…

Fixed Mortgage Rates

With a fixed rate mortgage, your mortgage rate and payments are fixed, meaning the amount you pay each month will stay constant for the term of your mortgage.

 

Pros

  • You can essentially “set it and forget it,” without having to worry about fluctuations month to month.
  • This makes budgeting a breeze, as the numbers falling under your mortgage will stay the same every month.

 

Cons

  • You may end up paying a premium for the stability protection of a fixed rate.
  • If the difference between a variable and fixed rate is significant, any premiums you’re paying may not be worth it.

 

Variable Mortgage Rates

With a variable rate mortgage, the mortgage rate will change with the prime lending rate, as set by your lender.

 

Pros

  • Historically, variable rates have proven to be less expensive over time due to lower interest charges.
  • With a variable rate, you’ll only be charged 3 months interest at any given time, should you choose to break your mortgage during the term.

 

Cons

  • Variable rates come with a level of financial uncertainty and can mean unpredictable payments.
  • A significant increase in the prime rate will increase your interest payable, and if you’re unprepared for this change, it can lead to financial burden.

 

These are just a few key points to keep in mind as you consider fixed versus variable rates, and what the differences could mean for your monthly mortgage payments.

At the end of the day, our main objective is to help you become mortgage free, faster.

You can trust us to read the fine print and cut through the jargon for you. We’re here to provide you with clarity and expert insight, so you feel equipped to make a sound financial decision.