Variable-Rate Mortgage

• A variable-rate mortgage, or adjustable-rate mortgage, is a mortgage where the interest rate can change with the economic conditions, such as a change in the Fed lending rate in the U.S. or the Bank of Canada key interest rate in Canada. A variable mortgage typically starts out with a lower interest rate than a fixed-rate loan but is not guaranteed for any fixed duration.
  
  

Open Mortgage

• In an open mortgage, the lender allows you to make extra payments up to and including the outstanding balance of your mortgage loan without penalty. Basically, you can pay off the loan in full at any time you wish or simply make extra payments of any amount at any time to reduce your mortgage balance. Therefore a variable-rate open mortgage would be a loan with a variable interest rate that allows you to make extra payments and pay the balance in full at any time.
  
  

Variable-Rate Mortgage Considerations

• When considering a variable-rate mortgage, evaluate the possibility that interest rates will increase significantly over the next three to five years. Although your variable-rate mortgage will start out at a lower rate than for a fixed term of, say, five years, if interest rates rise sharply in the near future you will be faced with having to pay those higher rates until the end of your variable rate term.
  
  Moving from a variable-rate option to a fixed-rate option before the end of the variable rate term may not always be the best course of action as penalties could apply and the rate for the new fixed term could be too high for you to afford.
  
  

Open Mortgage Considerations

• Although an open mortgage gives you the ability to make extra payments to reduce or pay off your mortgage balance, lenders typically charge an additional interest rate, sometimes as high as 1 percent more, for this benefit. For example, the Canadian Imperial Bank of Commerce (CIBC), as of July 7, 2010, charges 2.35 percent for its closed five-year variable flex mortgage, and 3.30 percent for its five-year open variable rate mortgage; a difference of 0.95 percent.
  
  

Alternatives

• A closed mortgage still may allow you to make additional payments of up to 10 percent or 20 percent of your mortgage balance each year. You may find that this option, coupled with better interest rate offers, makes a sound alternative to an open mortgage.
  
  Carefully review all options available with your lending institutions' mortgage representative. It may also be a good idea to speak to several banks and mortgage brokers before you settle on one lender with which to do business.