Open vs. Closed Variables

Folks often consider closed variable-rate mortgages to be restrictive because they can’t be paid off early without a penalty. 

For some, that’s a legitimate concern.

On the other hand, most (not all) closed variables allow you to terminate with a fairly reasonable 3-month interest penalty.  In addition, with a closed variable you pay about 0.70% less in interest (as of today) than you would in an open.

As a result, if you plan to break your mortgage early, you may save more by choosing a closed variable—despite the 3-month interest penalty.  Naturally, however, it will depend on the rate differential (between an open and a closed) and how long you plan to stay in the mortgage.

As an example, suppose that after 10 months you wanted to pay off a $300,000, 5-year variable-rate mortgage at prime (2.25% as of today).  In doing so, you’d be charged a 3-month interest penalty of about $1,688. 

That’s less, however, than the extra interest you’d pay over 10 months on a 2.95% open variable.  Given today’s 0.70% spread between open and closed rates, this 10-month guideline can be helpful when figuring out if an open variable is worth it.

Another benefit with most closed variables is their flexibility to be ported to a new property without a penalty. 

So, if you consider all the angles, closed variables are often less restrictive than many think.

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Assumptions: The above analysis assumes that prime rate does not go up, the amortization is 25 years, the borrower makes regular monthly payments, and a simple 3-month interest penalty applies. Some lenders calculate their variable-rate penalties differently, so speak with a mortgage planner for guidance specific to your circumstances.