We will often times get requests from clients looking for short term solutions to look into an Open Term Mortgage for them as they understandably do not wish to pay a penalty if they are possibly selling their home much sooner than the standard 5 year team. But is an open mortgage worth the higher rates to avoid the penalty? We’re going to break it down quickly for you to help you with your decision in the future.
Scenarios in which you would inquire about an open:
There are a couple of different scenarios where you would be concerned about breaking your mortgage prior to the 5 year term and want to avoid a penalty. Some of those are:
- You have purchased an investment property, will be renovating and selling within a year
- You are expecting rates to drop significantly sometime soon and don’t want to lock in for 5 years
Well, simply put, in some cases the open is worth it and in some cases not so much. Really it depends on the difference in interest between the open rate and your other options and more importantly the time in which you are planning to break the mortgage in.
A 1 year OPEN term mortgage is more or less around 6.00% right now. A 5 year Variable mortgage is around Prime -0.30%. For arguments sake, let’s compare a $300,000 mortgage both amortized over 25 years.
1 Year OPEN = $1,919.42/month
5 year VRM = $1,329/month.
The penalty on the Variable mortgage would be 3 months interest OR $1,725. The difference in payment between the two mortgages is $590.42. Therefore after just 3 months, you would be spending more on the difference in interest than you would just paying the penalty on the Variable rate mortgage. Which is why the length of time in which you plan on keeping the mortgage makes all the difference. Additionally, you may consider a Home Equity Line of Credit which is a much lower rate than an Open mortgage and is also fully open. This works a little differently but it is certainly an option as well.
Make sure you speak to your broker (The Financial Forum of course) when you find yourself in this type of situation so you get the right advice.
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