is a mortgage you can repay
in part or in full at any time without penalty. Generally,
interest rates are higher with this type of mortgage, but
it makes sense if you plan to sell your home soon. An open
mortgage can also be good for a short period of time when
interest rates are high, giving you the option to lock into
a longer term when the rates fall, or if rates start rising
even higher. To take advantage of an open mortgage you have
to be able to make payments from time to time additional to
your regular mortgage payments.
A closed mortgage usually offers the
lowest interest rate available but is not flexible. A closed
mortgage does not allow prepayments or lump sum payments,
or allows them only upon payment of penalties. Some closed
mortgages allow limited additional repayments of principal,
for example, once a year. Make sure you understand exactly
what is allowed and at what additional cost, and how much,
if any, notice must be given for each such prepayment.
A split or multi-rate mortgage allows
you to arrange part of your mortgage at one rate and term
and another part at a different rate and term. The advantage
is that you are getting at least one portion at a fixed
rate, if you don’t qualify for the whole amount at that
rate. It also means you can pay off the mortgage in chunks.
In Canada, mortgage interest rates can be fixed, variable
or protected (or capped) variable. A fixed rate does not
change during the life of the mortgage.
A variable rate changes as the prevailing
market rate changes. Usually, your monthly payment to the
lender stays the same. But the amount that goes to the principal
and the amount that goes to interest change as the interest
The protected (or capped) variable rate
sets a limit on how high your interest rate will rise. Lenders
usually charge a premium for a capped variable rate.
The term of a mortgage is the length
of time for which certain factors, such as the interest
rate you pay, are set when you negotiate a mortgage.
Terms usually last anywhere from six months to 25 years.
At the end of the term, you either pay off your mortgage
or renew it. If you renew, you can negotiate terms and conditions
Generally, the longer the term of the mortgage, the higher
the interest rate. The term of a mortgage is not the amortization
The amortization period is the time period
over which the entire debt will be repaid. Most mortgages
are amortized over 15-, 20- or 25-year periods. The longer
the amortization the lower your scheduled mortgage payments.
But you pay more interest over a longer amortization.
For example, for a $100,000 mortgage at 10 per cent interest
with a 25-year amortization period and a monthly payment
of $895, you will pay $168,500 interest. If you amortize
over 10 years for the same amount at the same interest you
pay only about $57,000 interest. But your monthly payment
is much higher—about $1,311.
You want to pay the least-possible amount of interest
on a mortgage. Here are some ways to reduce the amount of
interest you pay:
The faster you pay off your mortgage, the less interest
you will pay, and the sooner you will enjoy the security of
a mortgage-free home.