Selecting the perfect mortgage product can feel overwhelming with all the choices available. Understanding the differences between fixed, variable, blended, open, and closed mortgages will help you make a confident decision that matches your financial goals and comfort level with risk. Let’s go over the options and who they’re each best suited for.
Fixed Rate Mortgages
A Fixed Rate Mortgage offers predictable monthly payments, as the interest rate remains unchanged throughout the mortgage term. This stability makes it ideal for homeowners who value certainty and want to avoid the uncertainty of potential market fluctuations. Although fixed rates are often slightly higher than variable rates, they provide peace of mind especially with the rate fluctuations we’ve seen in recent years.
A fixed rate mortgage is suitable for those who:
- Prioritize stability, predictability, and peace of mind
- Prefer to know exactly what your monthly payments will look like over the entire term of the mortgage, and are willing to pay a slightly higher interest rate for that certainty
- Are on a set budget, especially first-time homebuyers
Variable Rate Mortgages
A Variable Rate Mortgage is best suited for those comfortable with interest rate changes. If the prime rate fluctuates, your monthly mortgage payment remains the same, but the portion going toward principal versus interest will adjust. Over time, rising rates may extend your amortization period, while falling rates can help you pay down your mortgage faster. You may have the flexibility to accept possible increases in your amortization should the interest rate increase; payments will stay the same if the prime rate changes, but more will be paid towards interest, which lengthens your amortization period.
A variable rate mortgage is suitable for those who:
- Are comfortable with some degree of uncertainty
- Have the financial flexibility to handle potential changes in their monthly payment structure
- Follow the market closely and feel confident they can capitalize on periods of lower rates
- Are willing to accept potential upwards rate shifts in exchange for reduced interest costs when rates are low
Blended Rate Mortgages
A Blended Rate Mortgage combines the security of a fixed rate with the flexibility of a variable rate. Part of your mortgage maintains a fixed interest rate, while the other portion fluctuates with the prime rate. This option allows you to benefit from potential rate drops without fully exposing yourself to the risk of rising rates. If you are someone who prefers calculated risks this is the one for you!
A blended rate mortgage is suitable for those who:
- Want to strike a balance between the predictability of fixed rates with the potential savings of variable rates
- Like the idea of diversifying their mortgage strategy and are open to taking on measured risk
- Are looking for a “middle ground” option between fixed and variable rate mortgages
Open vs. Closed Mortgages: Understanding Penalties and Flexibility
Open Mortgages
An Open Mortgage provides the freedom to pay off your loan in full or make additional payments at any time without facing financial penalties. Terms generally range from 6 months to 1 year and usually come with a fixed interest rate. However, if it’s a Home Equity Line of Credit, then it will be a variable interest rates, which moves in lockstep with the Bank of Canada overnight lending rate. Although these rates are higher due to their open nature, the flexibility may suit those who anticipate paying off their mortgage sooner or foresee changes in their financial situation. There will still be a minor fee to discharge the mortgage when paying it out or transferring to another lender. The interest rates for open mortgages are higher than they are for closed mortgages, because of the risk to the lender of potentially losing out on a return due to an early payout, as well not being able to collect any early payout penalty.
Closed Mortgages
A Closed Mortgage, on the other hand, locks you into your contract until the term ends. Early payoffs or refinances typically incur penalties, though most lenders allow a certain percentage of the principal to be paid off annually without fees. Closed terms can range from 6 months to 10 years and often come with lower interest rates due to their more restrictive structure. Closed mortgages can be either a fixed rate mortgage or a variable rate mortgage and while they are closed that doesn’t mean they cannot be paid out earlier if necessary, it’s just that there will be a penalty incurred to do so.
Choose the Mortgage Solution That’s Right For You
While it’s important to know the difference between various mortgage options, there’s nothing like getting the advice of a professional to help you through the process. The team at Auxilium Mortgage are experts at helping clients find the right mortgage solution for their unique situation, offering friendly and professional advice throughout the process. Contact our team today to learn more.