Overview
In Canada, open and closed variable mortgages offer distinct features, especially in terms of prepayment flexibility, interest rates, and suitability for different homeowner needs. Understanding these differences is crucial for selecting the right mortgage product.
Key Differences: Closed vs Open Variable Mortgage
Closed Variable Mortgage
- Interest Rate: Typically lower than open variable mortgages, making it a popular choice for borrowers seeking minimized interest costs.
- Prepayment Restrictions: You are limited in how much you can pay off early without incurring penalties. For example, many lenders allow up to 15% of the original principal as an annual prepayment without penalty; exceeding this amount triggers charges.
- Payment Flexibility: Monthly payments are generally fixed, but the allocation between principal and interest shifts as rates change.
- Conversion Options: Some lenders allow conversion to a fixed-rate mortgage without penalty if market conditions change.
- Best For: Homeowners planning to stay in the property for the term and not anticipating large lump-sum payments or early payoff.
Open Variable Mortgage
- Interest Rate: Rates are higher than closed variable mortgages, reflecting the added flexibility.
- Prepayment Flexibility: Can be paid off in full, partially, or refinanced at any time without penalty.
- Suitability: Ideal for those expecting to receive a financial windfall, planning to sell their home soon, or wanting maximum payment flexibility.
- Drawback: Higher interest costs over the same term compared to closed variable options.
- Best For: Borrowers who expect to repay their mortgage early or want the freedom to make large lump-sum payments at any time.
Comparison Table: Closed vs Open Variable Mortgages
| Feature | Closed Variable Mortgage | Open Variable Mortgage |
|---|
| Interest Rate | Lower | Higher |
| Prepayment Penalty | Yes (beyond allowed annual limit) | None |
| Flexibility | Limited | Very flexible |
| Conversion to Fixed | Often allowed | Allowed |
| Best For | Staying for full term | Selling or paying off soon |
| Monthly Payment | Fixed (principal/interest varies) | Fixed (principal/interest varies) |
Major Canadian Bank Offerings
- TD Canada Trust: Offers closed variable rate mortgages with up to 15% annual prepayment without penalty.
- RBC Royal Bank: Provides both open and closed variable options, with closed mortgages generally featuring lower rates and open mortgages offering full prepayment flexibility.
- Conversion Features: Many major banks allow conversion from variable closed to fixed if desired.
Provincial Variations
- Prepayment Allowances: Some provinces may mandate minimum prepayment privileges, but specifics vary by lender and provincial regulation. Always confirm your bank’s policy and provincial rules before committing.
- Penalties: Prepayment penalties may differ by province depending on consumer protection laws and lender practices.
First-Time Homebuyer Considerations
- Closed variable mortgages are usually recommended for first-time buyers due to their lower rates and predictable payments.
- Open variable mortgages may be suitable if you anticipate a major life change (e.g., job relocation, inheritance), but the higher rates often outweigh the flexibility unless early repayment is certain.
Summary & Recommendations
- Choose a closed variable mortgage if your goal is to keep interest costs low and you don’t plan on selling or paying off your mortgage early.
- Select an open variable mortgage if you need maximum flexibility due to uncertain plans or expect to pay off the mortgage in the near future.
- Always compare rates and terms from multiple lenders to find the best option for your circumstances.
For Canadians seeking the most competitive rates and a streamlined application process, use theratefinder as your platform for comparing residential, commercial, and construction mortgage products from top lenders. Start your personalized application at theratefinder.ca/onboarding/email for expert guidance tailored to your needs.
Next Steps:
- Identify your short- and long-term financial goals.
- Assess your likelihood of early mortgage repayment.
- Compare lender offerings and provincial rules.
- Begin your mortgage rate comparison and application at theratefinder for a tailored solution.