What Is a Convertible Mortgage?

April 21, 2022

What Is a Convertible Mortgage - Featured Image

While it’s true closed fixed-rate mortgages are most commonly chosen for their predictability, it could be worth your while to check out a convertible mortgage, as it offers some great benefits for many home owners.

A fixed-rate mortgage comes with hefty penalties should you find interest rates have dropped and you wish to refinance your mortgage early, or if you wish to put down a lump sum payment against the principal. But choosing a convertible mortgage for your home can give you flexibility in terms of interest rates, payment frequency, and lump sum payments leading to significant savings over time. 

A convertible mortgage is a type of open mortgage where you start with either an adjustable or fixed interest rate, but you have the ability to convert into a closed mortgage at any time during your term without penalty.

Every mortgage lender offers different options when it comes to convertible mortgages. Some only offer adjustable rates during the convertible period of your loan, while others may offer the option to start with a fixed interest rate. 

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Benefits to a Convertible Mortgage

There are many situations where a convertible mortgage is a good choice. If interest rates are expected to decrease, it may be prudent to sign up for this type of mortgage and watch the trends in the market for the right time to convert.

A Convertible Mortgage Offers Freedom

Convertible mortgages also give you more freedom when it comes to payment amounts and lump sum payments toward the principal without penalty. Many lenders offer flexibility in increasing payment amounts, some up to double the payment, with the extra amount applied directly to the principle. Lump-sum payments are also permitted without penalty but have limits based on a percentage of the mortgage amount.

Once you decide it’s the right time to convert to a closed mortgage, you’re free to choose any fixed-rate term available from your lender which is typically anywhere from one year to ten, with the best rates offered usually in a three-to-five-year term.

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It’s Less Expensive to Convert

Convertible mortgages are less expensive to change into another type of mortgage. With closed mortgages, there are penalties involved. Depending on how far away you are from your term’s maturity date, these penalties can be in the tens of thousands of dollars. While convertible mortgages come with additional fees to convert, they’re significantly less costly.

If you’re looking for more flexibility in your mortgage to take advantage of low interest rates and extra payments, this mortgage type might be right for you.

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Drawbacks to a Convertible Mortgage

Adjustable interest rates can be unpredictable, and if the prime lending rate increases so will your payments. Even if you choose to sign up for a fixed rate in your convertible mortgage, you may find the interest rates are increasing and could lose the opportunity to convert to a closed mortgage at the right time. Like any other type of open mortgage, there is risk involved.

Lenders typically charge additional fees at the time of conversion to a closed mortgage. It is worth investigating whether the interest saved during the conversion outweighs the fees applicable to the transaction.

Many lenders require a minimum time commitment for the mortgage to remain convertible before it can be changed. This can result in missed opportunities to lock in a lower interest rate.

Convertible mortgages give you more control over your financial situation. This mortgage type is a great compromise between the risk of adjustable-rate mortgages and the hefty penalties of a fixed-rate mortgage.

By choosing this product, you have the freedom to place additional payments toward your principal without penalty and watch the market trends for a lower interest rate to lock in at the right time. These benefits put you in control of your savings and help you pay down your mortgage sooner.

Photo credits: depositphotos.com

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About the Author:

At Sterling Homes, our mission is to provide the opportunity for affordable homeownership without compromise. Over the last 70 years, Sterling Edmonton has quickly become one of Edmonton’s most popular builders. We bring more than seven decades worth of exceptional customer service, superior design and unparalleled craftsmanship to the greater Edmonton area. As a member of the Qualico Group, Sterling Homes focuses on greater Edmonton’s finest family communities, while being able to offer some of the region’s most family friendly prices thanks to volume purchasing power for materials, trades and land. This has not only made Sterling one of Edmonton’s bestselling, move-up builders, but also one of the industry’s most respected home providers.

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