Mortgage Term Types

Closed, Open and Convertible Mortgages

There are many mortgage options to choose from when looking for the one that will finance your home purchase. Online mortgage calculators are a terrific place to start your research, but it is also important that you are comfortable with mortgage terms in general.

There are three basic types of mortgages: closed, open and convertible.

In a closed mortgage, rates and payments are established, or fixed, for a specific term length. For example, a five-year fixed-rate closed mortgage means that for five years your payments will not change, and your mortgage rate will not fluctuate. It will remain the same for the full length of the mortgage term.

An open mortgage allows you to repay toward the principal (original amount borrowed) of your mortgage at any time, without penalty.

A convertible mortgage is a short-term closed mortgage with the option to convert to a longer term closed mortgage at any time, without penalty.

Interest rates can be paid in one of two ways: fixed or variable. Fixed rates do not change within a term. If the rate you committed to on a three-year fixed rate mortgage was 4.25 per cent, and the following year prime rises to 7 per cent, your rate will remain unchanged.

A variable rate will oscillate dependent on the prime rate or benchmark rate of the current market. If you commit to a three-year variable rate term and prime rate falls or rises, your variable rate will adjust accordingly.

Payments on mortgages can be paid in any of these timings: weekly, bi-weekly, semi-monthly or monthly. Some lenders also allow the option pay accelerated bi-weekly or accelerated weekly. Choosing the accelerated repayment option allows you to make one extra monthly payment per year, meaning 13 monthly payments over 12, which will help you to pay down your mortgage faster.

In addition to selecting term and rate, you will also select an amortization period. Amortization is the entire length of time in which your mortgage must be paid. Amortization can last anywhere from 10 to 25 years in Canada.

A knowledgeable Canadian mortgage broker can help answer all of these questions for you, and help you to ascertain the amortization, mortgage term, mortgage rate, and re-payment option that will help you to see your mortgage paid down in less time, with less funds attributed to interest payments.