Is it a Good Idea to Choose an Open Mortgage? (hypotheque)

If you are thinking about an open mortgage (hypotheque) because you prefer the idea of the freedom of paying it off when you want, make sure you understand the total costs.

An open mortgage will allow you to pay off your mortgage balance with no penalty; usually, however, this kind of loan is only available as a variable rate loan, or together with a line of credit.

If this option offers such freedom, you may be surprised that not all borrowers take advantage of it. The reason that they do not is simply that it is too expensive.

Lenders offer their best rates to borrowers who commit to paying their loan for a fixed period of time - hypotheque. They do this because they have a guarantee that the loan will not be paid off (or taken to an other lender) for a given time.

Just how much difference is there?

If you want to have the option of paying off your mortgage at any time, the lender will adjust the mortgage rate so he will guarantee he earns a higher rate from the beginning of the loan - hypotheque.

Make a comparison of a closed variable rate mortgage to an open variable rate mortgage, and you will see. A closed variable rate mortgage is usually offered at .75% below the prime rate, and even lower in some cases. An open variable rate mortgage is offered at prime, or maybe a little less. Let us say that the prime rate is 6%; the fixed variable rate mortgage will be 5.1% to 5.25 %, while the open variable rate mortgage will be between 5.75% and 6%.

Does it make any sense to have an open mortgage? In certain situations, yes.

If you know you will be paying off your mortgage or changing your loan in 12 months, it would pay. - pret hypothecaire

For example:

• Mr. A takes a $100, 000 mortgage (pret hypothecaire) on an open term because he plans on paying the loan off in 12 months when he sells his rental property. His rate is 5.75% (prime less 0.25%). At the end of 12 months he has paid $5,634.20 in interest and his balance is $98,133.94.

• Mr. B chooses a closed variable rate mortgage in the same amount of $100,000 and he is able to get prime less .90% iii, or 5.1%. At the end of his 12 months, he can pay off the loan with a penalty of two months interest ($825.35). But, he has only paid $4,999.70 interest over the course of the loan, and his loan balance is $97,951.97

So Mr. A with the open mortgage has paid $816.47 more in mortgage payments than Mr. B, even though Mr. B had to pay an interest penalty of $825.35. The cost of each of these loans is just about equal after 12 months.

What conclusion can be taken?

The open mortgage (taux hypothecaire) is a great idea if you want to avoid high early payment penalties. But you should only use it if you are fairly certain that the home loan will be paid off within 12 months. If not, you are better off taking advantage of a fixed rate loan and take a chance on a payout penalty.

Taking the time to choose the right home loan strategy that is personalized to your specific situation can result in big savings.