If you are thinking about an open mortgage (hypotheque) because you like the idea of the freedom of paying it off when you need to, make sure you understand the total costs.

An open mortgage will allow you to pay off your mortgage balance with no penalty; usually, however, this kind of loan is only available as a variable rate loan, or together with a line of credit.

Since this option offers such freedom, you may be surprised that not all borrowers take advantage of it. The reason that they do not is because it is too expensive.

Banks and other lenders offer the lowest rate to borrowers whom they know will be maintaining the loan with them for a certain length of time. Without a guarantee such as this and borrowers can go to another bank at any time, lenders will have an additional premium to the rate to adjust for the lost income - pret hypothecaire.

What is the cost of an open mortgage?

Mortgages with this option of being paid off or transferred any time with no penalty usually have a higher cost in the form of a higher interest rate - hypotheque.

Compare a closed variable rate mortgage to an open variable rate home loan. The closed variable rate is usually offered at the prime lending rate less 0.75% (or more in some cases). The open variable rate mortgage will be offered at the prime lending rate only, or less 0.25% in most cases. So when the prime rate is 6.00%, then a fixed variable rate will be 5.10% to 5.25% while the open variable rate will be 5.75% to 6.00%.

Does it pay to have an open mortgage? In some situations, yes.

If you know you will be paying off your mortgage or changing your loan in 12 months, it would make sense. - pret hypothecaire

Let's look at the options:

• Mr. A needs a $100,000 mortgage (taux hypothecaire), and decides to do an open term mortgage because he plans to sell in 12 months. He is able to get the best open mortgage rate of prime less .25%, 5.75%. After 12 months, he will have paid $5,634.20 interest and the balance on the loan is $98,133.94.

• Mr. B secures a closed variable rate mortgage of $100, 000 with a rate of 5.1% (prime less 0.90% ). At the end of 12 months he pays off the loan with a payout penalty of $825.35 (two months interest). However, he has paid only $4,999.70 in interest during the 12 months and his balance is $97, 951.97.

Mr. A, even though he paid a higher rate, has only paid $816.47 more than Mr. B., even though Mr. B paid a penalty of $825.35. The cost of the two loans is about equal after the 12 month period.

What does this tell us?

The open mortgage (pret hypothecaire) is the right solution if you want to avoid high early payment penalties, but it is only the solution to use if you are sure you will be paying off the home loan within 12 months. If you are not, or if you are not certain, you should take out a fixed rate loan and maybe have to pay the penalty if you pay the loan off early.

Taking the time to choose the right mortgage strategy that is personalized to your specific needs can result in big savings.