There are advantages and disadvantages to the four main types of mortgages offered by lenders in Canada: Closed, Open, Fixed, and Variable rates. The fact is, although there are educated guesses, no one knows for sure what the mortgage rates will be in the future, or how the economy will affect those rates over time.
Pros: A closed mortgage offers the security of fixed payments for short terms from six months to a long term of 20 years. The interest rates are considerably lower than an open mortgage.
Cons: If you wanted to pay off the mortgage prior to its maturity date a penalty would be charged to break that mortgage. The penalty is usually three months interest.
Pros: Allows flexibility of prepayment at any time without penalty. In the event a borrower is planning on paying off their mortgage in the short term, it is recommended to have an open mortgage.
Cons: Open mortgages usually have shorter terms, but can include some variable rate/longer terms as well. Mortgage rates on Open Mortgages are typically higher than on Closed Mortgages with similar terms. ?
Fixed Rate Mortgage
Pros: Keeps the mortgage rate the same throughout the life of the mortgage, even if rates rise. Almost 75 per cent of all home loans are fixed rate mortgages. Lenders often offer different prepayment options allowing for quicker repayment of the mortgage and for partial or full repayment of the mortgage.
Cons: If rates go down, a fixed rate mortgage may prove to be more expensive than a variable rate one.
Variable Rate Mortgage
Pros: Offers the advantage of lower rates if mortgage rates decline. On the other hand, it exposes the mortgager to the risk that monthly payments will go up if mortgage rates rise.
Cons: They are best suited for people with a certain amount of equity in their home or a strong investment portfolio and whose net worth is growing. It is a little more difficult to qualify for a floating rate mortgage when you have less than a 20 per cent down payment, compared to a fixed rate mortgage.