The Trouble with Open Mortgages

Many clients also ask me about getting an open mortgage when purchasing or refinancing their properties. The concept is sound, an open mortgage enables you to pay off your mortgage at any time with no penalty fees. This is pretty appealing because many people who attempt to refinance before their term is up can be hit with an average penalty of $15,000 to $30,000. So, why would I think open mortgages are bogus? Open mortgages are priced at a high premium, so if you (and most don't) do decide to end your term early, the bank is sure to still make a profit. This doesn't mean that every home buyer should jump into a long five year fixed rate. There are some other creative options, to pay less and still have the flexibility of not being locked into an unbreakable mortgage.

1. Consider a variable rate

Yes, there is still a penalty, but a variable rate has a penalty of only three months interest, which is likely to be way less than the typical fixed rate penalty. A fixed rate mortgage is subject to an interest rate differential penalty, which basically means that you will have to pay the interest that a bank is missing out on.

2. Add a Line of Credit

Although more expensive than a variable rate, a credit line can be payed to zero at any time with no penalty. Having advanceable credit is only an advantage if your expect to need different portions of your equity at different times. An example being a home renovation.

3. Plan Ahead

The best way to avoid penalties and have the cheapest rate. Plan. Are you going to sell your home in two years? Get a Two Year Term Will you need to remodel in three years? Get a three year term, or add a line of credit. The more you can anticipate upfront the less penalties you will pay. Additionally, if you are required to pay a penalty this will be less the closer you are to the end of your term.

Typically, banks will advertise the money saving advantage of an open mortgage, without letting you know that with a little bit of creative planning (and the help of a mortgage broker), you can expect to pay less money.

Remember, I will happily evaluate your mortgage for free call me at 1.250.814.1627 or visit my website at www.joelolson.ca