Should I Take a Closed Mortgage or an Open Mortgage?
A mortgage will either be open or closed. An open term means you can pay the mortgage down or off at any time without penalties. A closed term is one in which there are limitations to how much you can pay down on your mortgage without incurring a penalty. Generally a closed mortgage (fixed terms) will have a 3 month interest or interest rate differential (ird) penalty (whichever is greater).
In terms of rates, closed mortgages will always be the lowest interest rate. Open mortgages carry a premium due to the flexibility they offer the client and due to the potential costs to the lender should you pay the mortgage off quickly. The lenders incur some upfront costs on setting up a mortgage and if the mortgage is paid out too quickly they may not recoup these costs.
So if all the mortgages have the same penalties, what do you need a mortgage broker for? Well it’s in the fine print that you have to dig for this information. Many of the banks have now started to use tricks in order to make the ird higher, meaning you will more often than not have an ird penalty versus a 3 month interest penalty. These penalties can be significant and will be the most costly mistake a client can make in choosing a new lender. The lowest current mortgage rates, may not be the best deal unless you understand these costs. We do more than just get you cheap mortgage rates!
Understanding the Difference Between Variable and Fixed Rate Mortgages
Variable rate mortgages (vrm) are by far the most tricky terms to understand of our mortgage rates in Edmonton. Some compound their interest rates monthly, while others calculate semi-annually. Some variable products guarantee a specific discount or guarantee the going ‘wholesale’ rate if you choose to lock the product into a fixed rate. Some lenders however don’t discuss this at all. On variable rate products, this is the main area of concern, what is my rate guarantee upon locking into a fixed term?
Fixed term mortgages on the other hand tend to be more straight forward, what you see is generally what you get. The only caveat to that however is the mortgage penalty. A number of the big banks now use funky math to calculate the penalties on their fixed rate mortgages, so you have to understand this before signing on the dotted line. You can educate yourself further in our knowledge center.