Page 18 - July-Aug 2022_LB

Open, Closed, Convertible, Hybrid:

Mortgage Types You Should Know

Michelle McNally courtesy REALTOR.ca
ust like searching for a home, there are many options beyond fixed or variable rates when it comes to
mortgages. In Canada, there are several types of residential mortgages available for everyone’s unique financial
Jcircumstances, no matter if you’re looking for an open mortgage or a hybrid option.
So whether you’re a new buyer qualifying for your first mortgage or an existing holder, what are the key things you
need to know about the most common mortgage types? Frances Hinojosa, CEO, co-founder, and principal mortgage
broker at Tribe Financial Group offers some insights.

Open and closed mortgages
If you anticipate making any lump sum payments on your mortgage, you might want to weigh your options between
a closed or open mortgage.
Hinojosa explains most traditional mortgages in Canada are considered to be closed, which have a predetermined
interest rate over a predetermined amount of time. Because of their predictability, a closed mortgage might be of
interest to a borrower who wants stability and to “set it and forget it”, such as a household working off of a fixed
income or budget.

“They’re comfortable with the timeline,” said Hinojosa. “They know what the payments are going to be for the next
five years and they don’t even have to worry about that mortgage at all until it comes up to maturity.”
Closed mortgages still offer pre-payment options, which is when you can prepay your mortgage balance before the
maturity date or when the mortgage term ends. However, closed mortgages may be limited to the amount you can
pay.

For example, Hinojosa says if you have a closed mortgage worth $100,000, most major banks will allow for a 20%
prepayment limit, meaning you can pre-pay up to $20,000 each year without penalty. If you’re planning to make
a substantial payment, an open mortgage that will allow for large payments—or let you pay off the mortgage
entirely—may be a better fit.
“If someone says, ‘Hey, I know I’m going to come into a large lump sum of money that’s going to exceed the pre-
payment ability that a closed mortgage has,’ then I would suggest to them an open term,” said Hinojosa.
She explains closed mortgages can appear enticing due to their comparatively lower interest rates, but it’s important
not to forget about potential breakage fees and the other features of closed mortgages. She says mortgage holders
should understand breakage costs and their mortgage’s portability should they decide to part from their closed
mortgage mid-term in the event of a lifestyle change or plans to move.

18 | REAL ESTATE NOW | LB@LoraleeBurns.com