Open Mortgage – is it a good strategy? (taux hypothecaire)

Everyone likes the option of an open mortgage, but is it really a good idea? The answer is yes, but only for the first year - pret hypothecaire.

An open mortgage will permit you to pay off the full balance on your mortgage with no penalty. This kind of loan is usually offered only with a variable rate loan, or as part of a line of credit.

You would think that everyone would want to have an option like this yet they don’t. Why don’t they? It’s costly.

Lenders give the lowest rate to the borrowers from whom they know they will be earning interest for a length of time (taux hypothecaire). They know this because the borrower guarantees that he will not pay down his loan and go to another borrower during a this period of time.

What is the cost of an open mortgage?

Mortgages with this option of being paid off or transferred any time with no penalty usually have a higher cost in the form of a higher interest rate - taux hypothecaire.

Compare a closed variable rate mortgage to an open variable rate home loan. The closed variable rate can be offered at the prime lending rate less 0.75% (or more in some cases). The open variable rate mortgage can be offered at the prime lending rate only, or less 0.25% in most cases. So if the prime rate is 6.00%, then a fixed variable rate will be 5.10% to 5.25% while the open variable rate will be 5.75% to 6.00%.

So does it make sense to have an open mortgage? - pret hypothecaire

Yes, if you plan on paying off your mortgage or switching lenders within 12 months of obtaining the mortgage.

Let’s look at the options:

• Mr. A needs a $100,000 home loan (pret hypothecaire), and decides to do an open term mortgage because he plans to sell in 12 months. He is able to get the best open mortgage rate of prime less .25%, 5.75%. After 12 months, he will have paid $5,634.20 interest and the balance on the loan is $98,133.94.

• Mr. B chooses a closed rate variable mortgage for his $100,000 mortgage. He gets a rate of prime less .9%, 5.1%. When the 12 months are over, and he decides to pay off his loan, he has a penalty of two months interest, that is $825.35. During the 12 month period, however, he has only paid $4,999.70 in interest. His mortgage balance is $97,951.97

Mr. A, even though he paid a higher rate, has only paid $816.47 more than Mr. B., even though Mr. B paid a penalty of $825.35. The cost of the two mortgages is about equal after the 12 month period.

What does this tell us?

The open mortgage (taux hypothecaire) is the right solution if you want to avoid high early payment penalties, but it is only a tool to use if you are certain you will be paying off the home loan within 12 months. If you are not, or if you are not certain, you should take out a fixed rate loan and maybe have to pay the penalty if you pay the loan off early.

Taking the time to choose the right home loan 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 Home Loans - pret hypothecaire, please visit: Hypotheque | Mortgage