Not all mortgage are created equally. Do you know the difference?
Open mortgages offer the most flexibility. If you want to make large payments, or pay off your entire mortgage without penalty, an open mortgage allows this. The trade-off is that an open mortgage requires you to accept some interest rate fluctuation for the flexibility of paying off all or part of your mortgage before the term is complete.
A closed mortgage means you’re locked in at a pre-determined interest rate, over a pre-determined period of time. If you want to pay your mortgage before the end of its term, you’ll likely have to pay your lender a penalty.
With a closed mortgage, the borrower can select a fixed or variable rate. Generally, closed mortgages have lower interest rates than open mortgages. Most lenders allow borrowers with closed mortgages to make a lump sum payment of 10, 15 or 20% of the original mortgage amount once a year without penalty. The payment is directly applied to the principal amount owing. Also, many lenders will allow the borrower to increase the payment by up to 10, 15 or 20% in addition to allowing the lump sum payment.
A convertible mortgage allows the borrow to change the type of mortgage during its term. For example, if a borrower wants to start with an open mortgage (see above) and then lock into a closed mortgage to avoid interest rate volatility if market factors change, the convertible mortgage allows this.
Convertible mortgages offer lower interest rates than open mortgages with the option of switching to a closed term. Converting to a fixed rate can be done by most lenders as long as the borrower originally selected a variable rate, and the mortgage has not reached the end of its term.
A hybrid mortgage means there is more than one type of mortgage contained in a single mortgage registration. For example, the registration may include a fixed rate portion, a variable rate portion, a line or credit portion, or any combination of these.
Each lender has their unique name for this type of mortgage. Hybrid mortgages are recommended for savvy borrowers who plan to use it as part of their overall financial management plan.
This type of mortgage is for homeowners who are over 55 years of age and want to convert their home equity into a lump sum payment or monthly cash payment – generally for living expenses.
The equity in their home is drawn down by the lender to the homeowner. When the homeowner no longer wants to occupy the property as their principal residence or upon their death, the balance of the loan is due. It must be settled from the proceeds of the sale of the property, either by the homeowner or the heir(s) to the property.
Our team can explain the ins-and-outs of each mortgage type to help you identify the best option to suit your needs.
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