Open, closed, fixed, variable. Let me break down the basic differences.
Closed mortgages have lower rates compared to open mortgages. Closed mortgages can come in ‘fixed’ and ‘variable’ form (more on that below), but there are conditions on the amount of principal you can pay down each year. Overpaying on a mortgage can result in penalty charges. Closed mortgages tend to be the more popular choice.
Open mortgages allow you to pay off your entire mortgage balance at any time. This is great for individuals that are planning to move in the near future, people who are expecting an inheritance or possibly a large bonus. Open mortgages allow you to pay off your mortgage without penalty. The big disadvantage is that you pay a premium for an open mortgage.
Variable Mortgage Rate
Variable mortgage rates tend to be lower than fixed rates. The rates can (and do) vary over the duration of the term. Variable mortgages fluctuate with market behaviour (by way of the prime rate) which affects your payments. This means that your payment amounts can change over time.
Fixed Mortgage Rate
Fixed mortgage rates are the most popular amongst Canadians. It’s essentially a “set it and forget it” mortgage as you are protected against interest rate fluctuations. Your payment stays the same over the duration of your term. Fixed mortgages offer greater stability as you will know exactly what you are paying each month, but with that security comes a higher interest rate.