Fixed or Variable – Oh, wait, what are open and closed terms?

What is a prime rate?

The prime rate, also known as the prime lending rate, is the annual interest rate that Canada’s major banks and financial institutions use to set interest rates for variable loans and lines of credit, including variable-rate mortgages.

What is an open mortgage?

An “open mortgage” or an “open-term mortgage” is an appealing option for those who plan to pay off their mortgage sooner rather than later. This type of mortgage can be repaid fully or partially at any time usually without prepayment interest fees.

It is also possible to convert these loans into loans with other terms (at any time) without incurring prepayment interest fees. Due to its flexible nature, the interest rates for open mortgages tend to be higher than those of closed mortgages.

What is a closed mortgage?

A “closed mortgage” or a “closed-term mortgage” is a common choice for people who aren’t planning to pay off their mortgages anytime soon. The interest rates for closed term mortgages tend to be lower than those of open mortgages. And, because closed term mortgages have lower interest costs, they help borrowers pay off their mortgages sooner.

Fixed or variable options are available for closed term mortgages, but there is a restriction on the principal amount that can be annually paid in the mortgage every year. In order to renegotiate rates on closed mortgages, there is a prepayment charge.  

Variable vs. Fixed Mortgage Rates

With fixed mortgage rates, the monthly payments stay the same over the full term of the mortgage. This is a popular mortgage option amongst Canadians as more than 50% of Canadians have fixed mortgage rates. Fixed mortgages rates allow borrowers to protect themselves against fluctuating rates.

Meanwhile, variable mortgage rates, as its name suggests, are subject to varied interest rates and payments. Variable rates usually tend to be lower than fixed rates but they have the element of volatility and are based on the current Canadian prime rate (which is pegged to the state of the Canadian economy).