If you are thinking about an open mortgage (hypotheque) because you prefer the idea of the freedom of paying it off when you want, make sure you understand the total costs.
An open mortgage will allow you to pay off your mortgage balance with no penalty; usually, however, this kind of loan is only available as a variable rate loan, or together with a line of credit.
If this option offers such freedom, you may be surprised that not all borrowers take advantage of it. The reason that they do not is because it is too expensive.
Lenders offer their best rates to borrowers who commit to paying their loan for a fixed period of time - taux hypothecaire. They do this because they have a guarantee that the mortgage will not be paid off (or taken to an other lender) for a certain length of time.
Just how much difference is there?
If you want to have the freedom to pay off your mortgage at any time, the lender will adjust the mortgage rate so he will guarantee he earns a higher rate from the beginning of the loan - pret hypothecaire.
Make a comparison of a closed variable rate mortgage to an open variable rate mortgage, and you will observe this. A closed variable rate mortgage is usually offered at .75% lower than the prime rate, and even lower in some cases. An open variable rate mortgage is offered at prime, or maybe a little less. Let us say that the prime rate is 6%; the fixed variable rate mortgage will be 5.1% to 5.25 %, while the open variable rate mortgage will be between 5.75% and 6%.
When does it make sense to take an open mortgage? - pret hypothecaire
It makes sense only if you plan on paying off your mortgage or moving it to a different bank within the next 12 months.
For example:
• Mr. A takes a $100, 000 home loan (hypotheque) on an open term because he plans on paying the loan off in 12 months when he sells his rental property. His rate is 5.75% (prime less 0.25%). At the end of 12 months he has paid $5,634.20 in interest and his balance is $98,133.94.
• Mr. B chooses a closed variable rate mortgage in the same amount of $100,000 and he can get prime less .90% iii, or 5.1%. At the conclusion of his 12 months, he can pay off the loan with a penalty of two months interest ($825.35). But, he has only paid $4,999.70 interest over the course of the loan, and his loan balance is $97,951.97
Mr. A (with an open mortgage) has paid $816.47 more for his home loan despite Mr. B having paid an interest penalty of $825.35. The cost of each mortgage becomes practically equal after 12 months.
Conclusion:
An open mortgage (taux hypothecaire) can be agreatmortgage tool that can prevent high early payout penalties. It should, however, only be considered if the chances are very high that the home loan will be paid off in the next 12 months. If the mortgage is not expected to be paid out within that time frame (13 months or more) it is more advantageous to take the fixed rate home loan and pay the payout penalty.
Taking the time to choose the right mortgage strategy that is personalized to your specific situation can result in big savings.
Gregory is an Accredited Mortgage Professional (AMP). To get more information on
Mortgage Loans - pret hypothecaire, visit:
Hypotheque - Mortgage Intelligence
