Margaret Berlo

Closed or Open?

Choosing a mortgage depends on your situation and how you want to handle the financial aspects of purchasing your new home.

Closed Mortgages are a conventional mortgage agreement in which the interest rate is fixed for a term and cannot be prepaid, renegotiated or refinanced before maturity, except upon payment of a pre-payment penalty. Some lenders may allow limited pre-payment privileges versus Open Mortgages here.

Open Mortgages can be prepaid or renegotiated at any time and in any amount, without penalty, but are usually not offered for longer terms.

Securitization & CMBs*

Lenders "securitize" mortgages when they package them up for the purpose of selling them to investors.

Securitization lets lenders raise new capital that they can lend to other borrowers.

Here is a basic overview of the most widely used form of securitization in Canada:

1. Lenders originate mortgages
2. Lenders arrange these mortgages into groups (pools)
3. Lenders sell these pools as mortgage-backed securities (MBS) to the Canadian Housing Trust (CHT), a CMHC-run entity
4. The CHT sells Canada Mortgage Bonds (CMBs) to generate funds to buy lenders' mortgages
5. The CHT uses the MBS cash flows to make interest payments on these CMBs to investors.

...and the process repeats itself over and over.

The mechanism above lets investors make secure investments in Canadian residential mortgages by buying CMBs.

Because CMBs are fully guaranteed by the government, investors demand less interest on CMBs. That lowers the cost of funds for lenders, which in turn lowers interest rates for homeowners.

(*This article has been referenced from Canadian Mortgage Trends.)

Contact me with your questions and for more information about these and other important topics!