Mortgages 101: Understanding the Differences Between ‘Open’ and ‘Closed’ Mortgages

Marci • July 28, 2014

If you’re planning to buy a home this year, you’re probably already investigating mortgages and the different options available to you. The reality is that for many families, home ownership is simply out of reach without taking on a mortgage. Mortgages come in a variety of forms, and it’s important to understand how they differ. ‘Open’ and ‘closed’ mortgages are two options you’ll often encounter when seeking funds to buy your home. Here’s what you need to know about these two different mortgage types, and what they mean for your financial future.

Open Versus Closed: Pay Periods and Penalties

The main difference between open and closed mortgages is that open mortgages allow early repayment, while closed mortgages do not. Every mortgage has a set repayment period that dictates what your payment schedule will be and when you will have paid your debt in full. A closed mortgage has a set repayment term, and full repayment of your mortgage prior to the end of this term will result in a penalty fee. In contrast, open mortgages offer repayment terms ranging from six months to several years, meaning you can repay your mortgage at your discretion without incurring penalties.
There is, though, one exception to the payment penalties for closed mortgages. Although you may not repay a closed mortgage in full prior to the end of the term, most of he time, you may remit up to 20 percent of the original mortgage amount per year by using a prepayment option. Talk to your mortgage advisor for a full explanation of how prepayment can expedite the mortgage repayment process.

Closed Mortgage Prepayment Penalties

If you decide to refinance or sell the property prior to the closed mortgage maturity date, you will incur a prepayment penalty equal to either three months’ interest or the Interest Rate Differential.
In the former case, three months’ interest is payable in one lump sum, while IRD applies only if current interest rates are below prevailing rates on the date of initial loan disbursement.
IRD is calculated by multiplying the difference between both percentage interest rates by outstanding balance and then by your remaining loan term. Thus, the earlier you repay the greater penalty you will incur in both the above scenarios.

That Pesky Interest: How Your Mortgage Type Changes Your Interest Rate

A typical mortgage will have an interest rate that is either fixed or variable. If your mortgage has a fixed interest rate, you pay a set percent of interest every month for the duration of your mortgage – and this amount never changes. If your mortgage has a variable interest rate, then the amount of interest you pay will fluctuate according to changes in the prime rate.
Regardless of whether your interest rate is fixed or variable, you will pay a different amount of interest for a closed mortgage than for an open mortgage. Open mortgages tend to have higher interest rates than closed mortgages, because in an open mortgage there is a lower probability that you will have the mortgage for the full term.

Open or Closed: Which is the Better Option?

Ultimately, deciding whether to opt for an open or closed mortgage will depend on your own personal needs and your plans for your financial future. If you have a limited income and require a set repayment schedule, a closed mortgage will give you the low interest rate and small monthly payment that you need. If, however, you have a higher amount of cash on hand and you expect to repay your mortgage very soon, an open mortgage will allow you to save a great deal of money in interest that you would have paid over the long term. Just be aware, however, that your interest rate may fluctuate over time – possibly making your monthly payments significantly higher than expected. The main consideration to make in deciding whether an open or closed mortgage is right for you is how long you plan to be paying off your mortgage. If you expect to pay off your mortgage extremely soon, an open mortgage is ideal. Otherwise, a closed mortgage is the safer option. Buying a home is a major purchase, and the mortgage you choose is one that will likely stay with you for most of your life. Open and closed mortgages offer vastly different terms that will appeal to different buyers, and it can be difficult to determine which option is your best bet. For more information about your mortgage options, and to discover which kind of mortgage will best meet your needs, contact our office today.

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Buying a Vacation Property or Rental? Here’s What Lenders Look For

By Marci Deane • October 15, 2025
Owning a vacation home or an investment rental property is a dream for many Canadians. Whether it’s a cottage on the lake for family getaways or a rental unit to generate extra income, real estate can be both a lifestyle choice and a smart financial move. But before you dive in, it’s important to know what lenders look for when financing these types of properties. 1. Down Payment Requirements The biggest difference between buying a primary residence and a vacation or rental property is the down payment. Vacation property (owner-occupied, seasonal, or secondary home): Typically requires at least 5–10% down, depending on the lender and whether the property is winterized and accessible year-round. Rental property: Usually requires a minimum of 20% down. This is because rental income can fluctuate, and lenders want extra security before approving financing. 2. Property Type & Location Not all properties qualify for traditional mortgage financing. Lenders consider: Accessibility : Is the property accessible year-round (roads maintained, utilities available)? Condition : Seasonal or non-winterized cottages may not meet standard lending criteria. Zoning & Use : If it’s a rental, lenders want to ensure it complies with municipal bylaws and zoning regulations. Properties that fall outside these norms may require financing through alternative lenders, often with higher rates but more flexibility. 3. Rental Income Considerations If you’re buying a property with the intent to rent it out, lenders may factor the rental income into your mortgage application. Long-term rentals : Lenders typically accept 50–80% of the expected rental income when calculating your debt-service ratios. Short-term rentals (Airbnb, VRBO, etc.) : Many traditional lenders are cautious about using projected income from short-term rentals. Alternative lenders may be more flexible, depending on the property’s location and your financial profile. 4. Debt-Service Ratios Lenders use your Gross Debt Service (GDS) and Total Debt Service (TDS) ratios to determine if you can handle the mortgage payments alongside your other obligations. With investment or vacation properties, lenders may apply stricter guidelines, especially if your primary residence already carries a large mortgage. 5. Credit & Financial Stability Your credit score, employment history, and overall financial health still matter. Since vacation and rental properties are considered higher risk, lenders want reassurance that you can handle the additional debt—even if rental income fluctuates or the property sits vacant. 6. Insurance Requirements Rental properties often require specialized landlord insurance, and vacation homes may need coverage tailored to seasonal or secondary use. Lenders will want proof of adequate insurance before releasing mortgage funds. The Bottom Line Buying a vacation property or rental can be exciting, but financing these purchases comes with extra rules and considerations. From higher down payments to stricter property requirements, lenders want to be confident that you can handle the responsibility. If you’re considering a second property, the best step is to work with a mortgage professional who can compare lender requirements, outline your options, and find the financing that works best for you. Thinking about making your dream of a vacation or rental property a reality? Connect with us today.

What to Expect in the Closing Process: A Step-by-Step Guide

By Marci Deane • October 8, 2025
You’ve found the right home, your offer’s been accepted, and your financing is approved—congratulations! But before you can pick up the keys and celebrate, there’s one more important stage: the closing process. Closing is the final step in your homebuying journey, where all the paperwork, legal details, and financial transactions come together. It can feel overwhelming if you don’t know what to expect, but with the right preparation, closing can be smooth and stress-free. Here’s a step-by-step guide to help you understand the process. Step 1: Hire a Lawyer or Notary A real estate lawyer (or notary, depending on your province) handles the legal side of closing. They will: Review the purchase agreement and mortgage documents Conduct a title search to confirm the seller has the legal right to sell the property Ensure the mortgage lender is properly registered on the title Handle the transfer of funds between you, the lender, and the seller Your lawyer or notary will be your main point of contact during closing, so choose one you trust and who communicates clearly. Step 2: Finalize Your Mortgage Your lender will send the mortgage instructions directly to your lawyer or notary. At this stage: You’ll provide proof of property insurance (lenders require this before releasing funds) You’ll confirm your down payment and closing costs are available in your lawyer’s trust account The lawyer will prepare all documents for your review and signature Step 3: Pay Closing Costs Closing costs typically range from 1.5% to 4% of the purchase price. These can include: Legal fees Title insurance Land transfer tax (where applicable) Adjustments for property taxes or utilities prepaid by the seller Home inspection or appraisal fees (if not already paid) Your lawyer will provide a final statement of adjustments so you know exactly how much is due on closing day. Step 4: Sign the Paperwork A few days before closing, you’ll meet with your lawyer or notary to sign all the necessary documents, including: Mortgage agreement Title transfer Insurance confirmations Statement of adjustments Bring valid government-issued ID to this appointment. Step 5: Transfer of Funds On the day of closing: Your lender sends the mortgage funds to your lawyer Your lawyer combines these funds with your down payment and pays the seller Legal ownership of the property is transferred into your name The lender is registered on title as a secured creditor Step 6: Get the Keys! Once the paperwork is filed and the funds have cleared, your lawyer will confirm that the transaction is complete. You’ll then get the keys to your new home—officially making it yours. The Bottom Line The closing process is a series of important steps, but with the right team in place, it doesn’t have to be stressful. By working closely with your mortgage professional and lawyer, you’ll have guidance every step of the way—from signing the documents to turning the key in the front door. If you’d like help preparing for the closing process—or want a clear breakdown of your own closing costs— connect with us today.

Stress-Testing Your Mortgage Affordability: Why It Matters

By Marci Deane • October 1, 2025
Buying a home is one of the biggest financial commitments you’ll ever make. That’s why lenders want to be sure you can handle your mortgage payments—not just today, but also if interest rates rise in the future. This is where the mortgage stress test comes in. Many Canadians hear the term but aren’t entirely sure what it means or how it affects them. Let’s break it down in plain language. What Is the Mortgage Stress Test? The stress test is a rule introduced by the federal government that requires all mortgage applicants to qualify at a higher rate than the one they’ll actually pay. Currently, you must qualify at the greater of your contract rate + 2% or the benchmark qualifying rate (set by the Office of the Superintendent of Financial Institutions). For example: If your lender offers you a 5-year fixed mortgage at 5.25%, you must show you could still afford the payments at 7.25% . Even if rates don’t rise that high, the stress test ensures you won’t be overextended if they do. Why Does It Matter? The stress test protects both borrowers and lenders by: Preventing over-borrowing : It ensures you don’t take on more debt than you can realistically handle. Preparing for rate hikes : With interest rates fluctuating, it’s a safeguard against sudden increases. Strengthening financial stability : It lowers the risk of defaults, protecting the housing market as a whole. While it can sometimes feel like a barrier—reducing the amount you qualify for—it’s ultimately designed to keep you from becoming “house poor.” How Does It Impact Buyers? The stress test can significantly affect your homebuying budget. For example, without it, you might qualify for a $600,000 mortgage, but with the stress test applied, you may only qualify for $500,000. That doesn’t mean your dream of homeownership is out of reach—it just means you may need to adjust expectations or explore other strategies, such as: Increasing your down payment Paying down existing debts Considering alternative lenders who may have different qualification standards Why Work With a Mortgage Professional? Every lender applies the stress test, but not every lender views your application the same way. An independent mortgage professional can: Shop multiple lenders to find the best fit Run affordability scenarios at different rates Help you understand how much house you can truly afford—without stretching your finances too thin The Bottom Line The mortgage stress test isn’t meant to stop you from buying a home—it’s there to protect you from financial strain down the road. By understanding how it works and planning ahead, you can make smarter choices and buy with confidence. If you’re thinking about purchasing a home, refinancing, or simply want to know how the stress test affects your options, connect with us today. We’ll help you stress-test your budget and find the mortgage solution that works best for you.