Open Term Versus Closed Term Mortgages: Know What Works for You

June 21, 2020

There are many things to consider when your mortgage is coming up for renewal. As the maturity date approaches, your renewal paperwork will arrive and you will probably be offered the option of opting for either an open term or a closed term.

Confused as to what the difference between the two might be?  Here is a breakdown of what each type of term involves:

Open terms
Open terms always have a higher interest rate as it expected that the mortgage will be paid out on or before the maturity date.  30 days’ written notice is generally required in the event of full or partial pre-payment.  A bonus is calculated on a per diem (per day) interest basis will apply in the event that written notice of less than 30 days is provided (e.g. 15 days’ written notice –  bonus equivalent to 15 days’ interest).  Notice must be in the form of a written request from the mortgagor’s solicitor, a title insurance company, or a financial institution, specifying the amount and date of the prepayment.

Closed terms
Closed terms receive a lower interest rate, but it is expected the mortgage will remain until maturity. In the event of pre-payment in whole or in part prior to the maturity date, a pre-payment penalty equivalent to the greater of: a) three months’ interest at the interest rate prescribed in the renewal agreement; or b) the interest rate differential based on the difference between the interest rate prescribed in the renewal agreement and the lender’s posted interest rate for a closed term that is the next shortest to the remaining term of the mortgage will apply. The pre-payment penalty will be calculated on the principal amount to be prepaid.

Choose the type of term that works best for you and return the completed paperwork to your lender. It’s a good idea to make note of the first date of your new payment and the new amount that will be debited from your account.


About Magenta Capital Corporation
Established in 1994, Magenta Capital Corporation (MCC) is one of Canada’s oldest and largest Mortgage Investment Corporation (MIC) managers.  MCC sources, underwrites and manages a portfolio of primarily residential first mortgages, secured by properties located in Eastern and Southwestern Ontario, two of the strongest, most recession resistant real estate markets in the country. MCC has a 24-year track record of generating superior returns for the shareholders of Magenta Group MICs.  MCC exercises oversight responsibility for the Magenta Group MICs in its capacity as General Partner of three limited partnerships, each of which is wholly owned by one of the MICs.
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