The tooth fairy cometh?  One of Canada's oldest and most respected mortgage lenders has just announced a new mortgage product, the fully open five year term mortgage.   For years, while the rates were up,  I had been searching for such a product for my Clients, and now that rates are down, the product appears out of nowhere.   This excellent product will no doubt sell itself.  Imagine a five year term mortgage at the posted (non-discounted) rate, which will allow you to payoff the mortgage at anytime without incurring a penalty, refinance at anytime without penalty, pay down your mortgage in any amount at any time without a penalty, and at the same rate as the posted five year closed mortgage.  What's the catch?

If you look closely at the mortgage offer, the rate of interest is the posted rate.   Had you chosen the closed product, some discretion was eminent in the rate.   In other words, if you check out my website, you will find that my five year term is 1% less than the posted rate.  By today's standards, 7.35% instead of 8.35% will knock of $100 per month off the normal $150K mortgage.  To payoff a normal closed mortgage will probably cost you $2600 or less (a 3 month interest penalty).  The actual penalty clause in most mortgages is quoted as being: "the greater of a three month interest penalty or the difference between the rate you now have and the existing rate for the remaining term."  Since the rates are as low as they are, the three month penalty is probable.  So in our case, the lender only has to worry about the first 26 month of the new open term mortgage before they are guaranteed to make money on your decision to choose the open term.  In other words, had you chosen closed and paid off the mortgage after 26 months, the savings you had enjoyed over the first 26 months is really what is paying off the mortgage.  After 26 months, the mortgage rate becomes a bonus until the end of the term.  Had you taking the open mortgage and not prepaid, or paid off the mortgage, your decision potentially would have cost you $6000 (that's $100 per month times 60 months) over the term (had you known enough to negotiate a discounted rate at your last renewal).  Don't take this article the wrong way.    I do endorse this excellent product, provided you take advantage of the fine print.  If you are fairly certain to amass a sizeable amount to prepay (greater than the allowable amount under the closed venue), or you are fairly certain you will be scaling down in your housing needs, or you are fairly certain you are going to be selling your house and renting for a while, then the product is a sure thing.  If you do not fall into the above scenarios, then I would probably opt for the closed mortgage at a discounted rate, making sure that the penalty clause with your lender is as described above (ie. 3 month penalty or interest differential).  Not all mortgage companies will allow you to get out of a mortgage for the sake of wanting out.  Some mortgage companies will lock you in unless you are selling.  Be aware.