Buying a house is a major financial and personal milestone in many Canadians’ lives. It can bring about feelings of great excitement as well as stress due to the lengthy and often complicated process. One of the major questions you may be considering right now is whether you should opt for an open or closed mortgage. If you’re not sure which is best suited for you, keep reading to find out.
A traditional open mortgage is where you are able to pay your mortgage off in full at any point in time, with absolutely no penalties. Meaning you can make lump sum pre-payments to pay off the loan before the end of the amortization period, with no prepayment penalties. You also have the option of refinancing or renegotiating the contract at any point in time without penalty as well.
The freedom of making prepayments of any size, when you want, will help you pay off your house faster and save on interest in the long run. But as with everything, there must be a downside. Traditional open mortgages often have variable and higher interest rates in comparison to closed mortgage rates due to the pre-payment flexibility they offer. This makes open mortgages more susceptible to fluctuation in payments and as such you need to be financially stable enough to handle the change.
The “Manzil” Open Mortgage
The Manzil open mortgage is a unique hybrid of an open and closed mortgage. They are able to provide their clients with the fixed low-financing rate of a closed mortgage and the flexibility of prepayments of an open mortgage. Moreover, they are the only mortgage provider in Canada who have terms that go up to 25 years. Meaning you can have the stability of fixed payments for as long as 25 years while also having the ability to pay off the loan whenever you wish. This is all possible because Manzil is a Halal mortgage provider and operates its business according to Shariah law, which prohibits them from doing business with the purpose of maximizing their profits.
Closed mortgages are by far the most common option offered by traditional banks. Canadians often opt for closed mortgages due to the lower interest rates and longer amortizations. The predictable payments often go hand in hand with closed mortgages, which give borrowers the much-needed security and stability when it comes to their finances. However, when you opt for a closed mortgage, you are bound by the contract terms and you must oblige by them unless you are willing to incur a penalty, which is usually quite significant. You also can’t refinance or make changes to your terms until maturity unless you’re willing to pay a penalty fee.
Moreover, if you’re looking for prepayment options, closed mortgages typically do have some, however, it is restricted by how much extra you can pay each year. Closed mortgages typically allow a certain amount that you can pre-pay each year to help pay off the house faster, but any more than the agreed-upon amount and you will be charged a penalty. A mortgage prepayment penalty can cost approximately 3 months of interest on your current mortgage balance if you have a variable interest rate. However, if you have a fixed rate, banks can choose to charge you an interest rate differential (IRD) which can cost you tens of thousands of dollars.
What Mortgage Style Best Suits You?
There’s no right or wrong decision when deciding between an open or closed mortgage; it all really depends on your financial capability and personal preference. Here are some factors to consider when choosing between an open or closed mortgage.
Choose an open mortgage if:
- You plan on making large prepayments due to an expected increase in cash from a wage increase, inheritance, etc.
- You want to pay off your mortgage before the end of your term
- You plan on selling your house within the near future
- You are comfortable with fluctuating payments due to the variable interest rate
If you believe an open mortgage is a good fit for you, Manzil is a great choice for members of the Muslim community as well all Canadians interested in a different way of borrowing. Manzil offers Halal open mortgages with extra benefits like fixed rates and terms that go up to 25 years.
Choose a closed mortgage if:
- You’re unlikely to pay off the mortgage before its maturity
- You plan on staying in your home until the end of your loan term
- The limited prepayment option provides you with enough flexibility to make prepayments if you wish.
Mortgages are complicated. Understanding your options and your needs is key to choosing the right solution for you. Whether you go with open or closed, read the terms and conditions along with the small print to see how each option would affect your financial stability. Do your research, compare options and use it to make an informed decision.
Guest Article: Written by Loans Canada