The length of time for which the interest rate is fixed is called the term. Most mortgages have terms of six months to five years.
Open versus closed term
An open mortgage is one which allows payment of the principal, in part or in full, at any time without penalty. Open mortgages tend to be for a short term - usually six months or one year. Since open mortgages offer greater flexibility than closed mortgages, they usually have a higher interest rate.
A closed mortgage requires you to maintain a specific payment schedule. A penalty usually applies if you repay the loan in full before the end of the term.
A convertible mortgage allows you to renew your mortgage at any time without penalty for a longer term, closed mortgage.
Short versus long term
When interest rates are either high or falling, there is a tendency to choose a shorter term mortgage. This strategy pays off if you can renew at a lower rate six months or one year later.
You may want to consider a longer term mortgage if interest rates are rising, if you have limited income or if you want to keep your mortgage payments the same for a few years.
The effects of interest rates on the term
As a rule, you'll find interest rates rise with the length of the term. The lowest interest rates are usually associated with six-month and one-year mortgages. Higher interest rates mean higher mortgage payments.
Example: If you have a $100,000 mortgage and 25 amortization
| Interest Rate |
Monthly Payment |
Total Amount |
Total Repaid Interest paid |
| 6% | $ 639.81 | $ 191,943. | $ 91,943. |
| 7% | $ 700.42 | $ 210,126. | $ 110,126. |
| 8% | $ 763.21 | $ 228,963. | $ 128,963. |
| 9% | $ 827.98 | $ 248,394. | $ 148,194. |
Assumes constant rate for the entire 25 years. Payment consists of
principal and interest.
When you apply for a certain mortgage, you'll receive an interest rate that is usually
guaranteed for up to 90 days or until the day before closing, whichever comes first. The
interest rate on your mortgage will be the lesser of the rate at application or on the day
before closing. If rates increase, you are protected. If rates decrease, you should
receive the lower rate.
