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  • Before accepting the first mortgage you are offered, remember that there are a wide range of mortgage options available to you from a large number of providers. Besides fixed and variable rates, buyers also need to decide between an open or a closed mortgage. You can use the tools here at LowestRates.ca to figure out which one is right for you.

    An open mortgage allows homeowners the ultimate flexibility in payments – the entire mortgage balance can be paid off at any time! While you won’t pay a penalty for discharging the loan, it must be recognized that interest rates will generally be higher on open mortgages and tend to be variable. You’ll probably be paying the prime rate plus a substantial premium. However, you can move into a regular fixed rate mortgage at any time if you decide variable interest rates are no longer for you. This is what makes an open mortgage so appealing – you can pay it off or move to another product at any time!

    Alternatively, closed mortgages generally offer better interest rates than open mortgages but diminish a borrower’s flexibility. With a closed mortgage you won’t be permitted to pay off the loan without incurring a penalty, although most closed mortgages do allow for accelerated mortgage payments of some kind. A few lenders will allow you to double up your scheduled mortgage payment or pay an annual lump sum; each financial institution sets its own prepayment terms. Nonetheless, with a closed mortgage you are essentially agreeing to keep the loan for the entire term, and if you discharge it early you’ll be subject to penalties that can easily be tens of thousands of dollars! Borrowers who sell their house due to a relocation or job loss can end up with less money than they anticipated because high break fees have gobbled up their equity.

    Break fees are generally either the sum of three months of interest on your mortgage or the interest rate differential (IRD), whichever is greater. Generally only applied to fixed rate mortgages, the IRD is the difference between what you would have paid in interest to the bank and what they can now make on the funds they lent you at current rates for the remainder of your term. If you were paying the bank 5% interest and they can now only lend the money out for 3%, you’ll be paying the difference to them in some form, depending on the precise methods they use to calculate it. Of course, the more months remaining on your term the greater the IRD penalty because the difference in interest is incurred for a longer period of time.

    Unfortunately for borrowers, today’s falling fixed interest rate environment means they will almost surely be paying the IRD, and it can equal many times the sum of three months’ interest. IRD can deal a nasty surprise to Canadians who failed to read the fine print on their mortgage contract.