Lenders offer a handful of different types of loans in Ontario, but two of the most common are known as open mortgages and closed mortgages. What is the difference between the two?
An open mortgage is one in which you can pay as much as you want at any time. This goes above and beyond your principal. As long as you make the minimum payment on time, you're good to go, and you can add to it if you want to reduce the mortgage more quickly.
This is attractive because the extra payments usually go right toward the principal itself. A standard payment includes a lot of interest, but the extra payment does not. Therefore, these extra payments really add up by saving you money in the long run on interest, and you can pay the mortgage off more quickly.
A closed mortgage, on the other hand, does not give you this freedom. Lenders like closed mortgages because they want to maximize their earnings through interest payments.
Even a closed mortgage may allow you to pay some extra, but there will typically be an upper limit so that you can't pay too much. If you want to go over, extra charges are applied. In this fashion, lenders are ensuring that they still get more money, even if you pay off your 30-year loan in just 20 years.
It's very important to read the fine print on your mortgage so that you know exactly what you're allowed to do and what it's going to cost. Never assume that any financial agreement works in a certain way before you sign.
Source: Financial Consumer Agency of Canada, "Buying your first home: Three steps to successful mortgage shopping," accessed May 28, 2015
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