Mortgage Products
 January 19 2016     Posted by Siemens Group

The decision regarding whether to take a fixed or a variable product largely depends on a borrower's individual risk tolerance and the current market conditions. Although historically people who have chosen a variable strategy have had lower overall interest costs than those who selected fixed products, many Canadians choose the fixed product due to the certainty it provides for a set term.

Closed Mortgages
Most mortgages are 'closed' meaning that you have a guaranteed interest rate for a specified period of time and you have a contract with the lender to keep the mortgage for that period of time. If you should choose to pay out the mortgage early you will need to pay a penalty to break that contract. The mortgage document will allow provisions to avoid this penalty if you have the mortgage assumed by the new purchaser of your home or if you port the mortgage to your next home (policies vary by lender).

Most closed mortgages have pre-payment options attached to the mortgage that allow you to pay down the mortgage more quickly. In fact, with many lenders if you were to fully take advantage of pre-payment privileges you could be mortgage-free in under 5 years, so if you plan to remain in your property for the forseeable future, you will likely not feel too 'trapped' by a closed mortgage.

Some lenders have heavily advertised 'no-frills' or 'fully closed' products which offer very limited pre-payment options and/or cannot be broken unless you sell your property. Be very wary of these products. Although they are usually priced slightly more aggressively than a less restrictive product, the restrictions can cause serious problems down the road. 

Open Mortgages
Open mortgages are open to full prepayment at any time without penalty. They are usually stated as a 6 month or 1 year term, where the interest rate is guaranteed for that time period. Open mortgages will have higher interest rates than closed products because of this added flexibility. Unless you plan to pay your mortgage off in the specified period of time it is usually more cost effective to take a closed mortgage.

Secured Lines of Credit
Secured Lines of Credit allow you to borrow against the equity in your property at much more competitive rates than would be available for an unsecured line of credit. They are typically priced between prime +.50% and prime +1.5%, and usually you can make payments that are as low as interest-only. This makes them popular vehicles for people who want to borrow for investment purposes. Secured Lines of Credit are fully open, and as such are popular alternatives to traditional open mortgages.

Cash Back Options
These mortgages will typically be priced at the bank posted rate. The lender will pay you between 3-5% of the original mortgage balance on the day of funding the mortgage. These mortgages do serve a purpose for some individuals who require cash up front, but generally the increased interest cost associated with the higher rate is greater than the amount of cash received up front!