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HOMEBUYER RESOURCES
Mortgages can be structured in different ways depending on how much flexibility, payment certainty and access to your home equity you need.
Understanding the differences between open, closed, convertible, hybrid and reverse mortgages can help you identify which options may fit your financial situation and long-term plans.
CHOOSE THE RIGHT STRUCTURE
Some mortgages offer greater flexibility to make additional payments or pay off the loan early, while others trade that flexibility for lower rates or more predictable terms.
A mortgage professional can help you compare the features, restrictions and costs associated with each option.
CORE MORTGAGE OPTIONS
The biggest difference between an open and closed mortgage is how much flexibility you have to repay the mortgage before the end of the term.
MAXIMUM FLEXIBILITY
An open mortgage allows you to make large payments or pay off the entire mortgage before the end of the term without a penalty.
This option offers maximum flexibility and may suit homeowners who expect to pay down a significant portion of their mortgage early.
Borrowers generally accept more fluctuation in the interest rate in exchange for this additional repayment flexibility.
LOWER RATES, MORE RESTRICTIONS
A closed mortgage is a commitment with a predetermined interest rate over a predetermined period of time.
If the mortgage is fully paid before the end of the closed term, the borrower will generally have to pay the lender a penalty.
Closed mortgages can use either a fixed or variable/adjustable rate, depending on the borrower’s needs and preferences.
Many lenders allow borrowers to make a lump-sum payment of 10%, 15% or 20% of the original mortgage amount once each year without penalty. Some lenders also allow borrowers to increase their regular mortgage payment by similar amounts.
MORE FLEXIBLE STRUCTURES
These mortgage structures allow borrowers to combine or change mortgage features as their needs evolve.
CHANGE AS YOUR NEEDS CHANGE
A convertible mortgage allows homeowners to change the type of mortgage they hold during the mortgage term.
For example, a borrower may begin with an open mortgage and later choose to lock into a closed mortgage.
Most lenders also allow borrowers with a variable-rate mortgage to convert to a fixed-rate mortgage before the end of the term.
COMBINE MULTIPLE PRODUCTS
A hybrid mortgage combines more than one type of mortgage product within a single mortgage registration.
It may include a fixed-rate portion, variable-rate portion, line of credit or a combination of these.
Each lender has its own structure and name for these products, and the current page notes that a registration may contain anywhere from two to 100 different products.
The current page notes that this type of product is often suggested for a financially sophisticated borrower who plans to use it as part of a broader financial strategy.
ACCESS HOME EQUITY
A reverse mortgage allows homeowners age 55 and older to convert some of the equity in their home into either a lump-sum payment or monthly cash payments, generally to help with living expenses.
Rather than the borrower making regular payments to reduce the mortgage, the lender advances money to the homeowner against the equity in the property.
The loan balance becomes due when the homeowner no longer occupies the property as their principal residence or upon the death of the borrower.
The balance is generally repaid from the proceeds of the property sale, either by the homeowner or their heirs.