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Open vs. closed mortgage: What's the difference? (and how to choose the right one for you)

“Always pick your yard based on your Summer lifetstyle.”


March 1, 2018 - Karl Yeh

When would you choose between an open vs. a close mortgage? In this episode, we discuss the differences, how to pick between the two and why banks actually provide the two options. 


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Karl Yeh:

Hi, everyone. Welcome to another edition of Homebuyer's School.

Today I'm joined by Mujtaba Syed, Mobile Mortgage Specialist with TD Canada Trust, and today the question we're going to answer is [00:00:30] :

"What's the difference between open and closed mortgage rates?"

So, Mo, what is that difference?

Mujtaba Syed:             

Yeah, so it's a great question.

The main difference between an open mortgage and a closed mortgage is that an open mortgage is there's normally a term attached to it.

You could actually leave that lender at any time without any penalties incurred.

A closed mortgage just means that technically you've signed a contract with a bank to be there for a certain time period,

So if you decided to go with a five-year term, you have to kind of stay with your five-year term and then decide after that if you want to stick with the same [00:01:00] bank or go somewhere else.

But with an open mortgage, you can actually move at any time without actually incurring any penalties.

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Karl Yeh:                      

When should I pick an open versus a closed mortgage rate?

Mujtaba Syed:             

Yeah, mostly what I would recommend to my clients is that if they're thinking about selling anytime soon or leaving or they're thinking about moving out of the country or moving cities, an open mortgage is a very good option at that time so you can get [00:01:30] it for a very short time period and actually get out without paying heavy penalties to get out.

Once again, it's a great conversation to actually have with your lender at that time and let them know about your future plans as well.

And that could help determine what the best rates are for you guys, if open makes more sense or closed makes more sense.

Karl Yeh:                      

Does an open or closed mortgage rate have anything to do with a fixed or variable mortgage rate or completely separate things?

Mujtaba Syed:             

Yeah, there actually does.

It's a great question. We have an open fixed mortgage rate [00:02:00] and we also have open variable mortgage rates, so they're predominantly going to be a little bit higher than the closed fixed mortgage rates and closed variable rates.

The reason is because banks offer discounts for clients to attract clients.

When you're going with an open mortgage rate, there's no loyalty, what banks technically find, so it's going to be a little bit higher and technically in line with what all the banks are offering.

It's not going to be a discounted rate at all. It will be a little bit higher rate than the closed fixed or the [00:02:30] closed variable.

Karl Yeh:                      

In an open mortgage rate, say halfway through that term that you signed, you can just switch to another bank?

Mujtaba Syed:             

Yeah, absolutely.

You could switch to a different lender which you feel like has better rates for you, has better terms for you.

You can sell your home, you could do any of those things to actually get out of that mortgage without any penalties.

Karl Yeh:                      

Why do the banks actually provide the option of a open because wouldn't the banks want to lock you into a mortgage with that particular [00:03:00] bank?

Mujtaba Syed:             

Yeah, absolutely. But at the end of the day, what we want to do is we want to actually give options to our clients, whatever is going to be best fitted for their needs.

A lot of different life situations can happen where options are a great thing to have, so for banks we want to be able to know what's best for them.

Karl Yeh:                      

So, Mo, do you have anything else to add in terms of open and closed mortgage rates?

Mujtaba Syed:             

 I would just recommend speaking with your specialist and bank or lender and [00:03:30] see what's best for you, what kind of fits in with your guy's budgeting, with your future plans, and determine which kind of rates going to ideal for your situation.

Karl Yeh:                      

Perfect. Well, thank you very much, Mu. Thank you very much everyone for joining us.

Remember to watch our video on the new mortgage rules in Canada. Have a good day.


Your turn:

Let us know if you have additional mortgage questions or home buying questions that we can answer by submitting them in the comments section below. 

Homebuyer's School publishes new content weekly so subscribe or check back regularly for the latest information, strategies and tips from homebuying experts. 

About Mujtaba Syed:

Mujtaba is an experienced mobile mortgage specialist with a demonstrated history of working in the banking industry. Skilled in Negotiation, Commercial Lending, Banking, Sales, and Credit Analysis. Strong product management professional.

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