Business Is it a good idea to choose an open mortgage? (hypotheque)
An open mortgage will allow you to pay down the full balance on your mortgage with no penalty. This product is usually offered only with a variable rate loan, or as part of a line of credit.
You would think that everyone would want to take advantage of an option like this yet they don't. Why don't they? It's too expensive.
Lenders give the lowest rate to the borrowers from whom they know they will be earning interest for a length of time (pret hypothecaire). They know this because the borrower guarantees that he will not pay down his loan and go to another borrower during a this period of time.
So how much does an open mortgage cost?
The way you have the freedom to pay off your mortgage (hypotheque) at any time, and take away the guarantee the lender has that he will earn interest from you for a fixed time, the lender will need to have an increased up front earning. If you compare a closed variable rate mortgage to an open variable rate mortgage, you will see that the closed rate mortgage can be offered as low as .75% below the prime rate. The open variable rate mortgage will usually be offered at the prime rate. If the prime rate is 6%, the fixed variable will be 5.25% or maybe even lower, while the open variable rate will be 6%, maybe a little lower to 5.75%.
So does it pay to have an open mortgage? - pret hypothecaire
Only if if you plan on paying off your mortgage or switching lenders within 12 months of getting the mortgage.
Here are the examples:
- Mr. A intends to borrow $100,000 for his home and chooses an open mortgage because he will be selling rental property and using the earnings in 12 months to pay off his mortgage (pret hypothecaire). His rate on the open mortgage is prime less .25%, 5.75%. During the first 12 months, he pays $5,634.20 interest and he has a mortgage balance of $98,133.94.
- Mr. B decides upon a closed variable rate mortgage in the same amount of $100,000 and he can get prime less .90% iii, or 5.1%. At the conclusion of his 12 months, he can pay off the mortgage with a penalty of two months interest ($825.35). But, he has only paid $4,999.70 interest over the course of the loan, and his loan balance is $97,951.97
Mr. A (with an open mortgage) has paid $816.47 more for his home loan despite Mr. B having paid an interest penalty of $825.35. The cost of each loan becomes practically equal after 12 months.
Conclusion:
An open mortgage (taux hypothecaire) can be agreatmortgage tool that can prevent high early payout penalties. It should, however, only be considered if the chances are very high that the home loan will be paid off in the next 12 months. If the mortgage is not expected to be paid out within that time frame (13 months or more) it is a better idea to take the fixed rate home loan and pay the payout penalty.
Taking the time to choose the right home loan strategy that is personalized to your specific situation can result in big savings. Gregory is an Accredited Mortgage Professional (AMP). To get more information on Home Loans - pret hypothecaire, please visit: Hypotheque | Mortgage
Related Tags: mortgage, home loan, mortgage rates, hypotheque, taux hypothecaire, prêt hypothécaire
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