Open vs Closed Mortgages

open vs closed mortgages

What is an open mortgage?

An open mortgage is a type of loan that allows you the flexibility to make payments in excess of whatever your minimum required payments are. Once you’ve fulfilled your minimum payment obligation, it lets you pay on the principal amount at any point in time, and without a penalty. This allows you to pay off your property faster than the full number of years your mortgage amortization was based on.

In the open mortgage, the terms are just a bit more flexible than a closed mortgage. As you think about applying for an open mortgage, it is important to consider whether it’s right for you.

What is a closed mortgage?

On the other hand – a closed mortgage means that once you have agreed to make payments of a specified amount at a particular time, then you will be penalized if you overpay. The borrower if they pay more than the allotted amount to the principal will incur a penalty. This penalty applies if the borrower surpasses the allotted prepayment privileges if they increase monthly payments. For example if you wish to switch your mortgage provider and that provider pays off the principal outstanding they will also have to pay an additional percentage as they would have paid off a bit earlier than the agreement.

This is usual practice and it is always wise to ask your broker to give you the heads up on what your particular agreement says. This type of mortgage is also known as a closed-end mortgages in some places.

The Benefits

Of course each type of mortgage open or closed has its own advantage. These can be to the benefit of the borrower depending on their specific circumstances.

Benefits Of The Open Mortgage

There are a significant number of persons out there today, who have been running their own business or even freelancing. In some months they will actually make a bit more than they had budgeted. Therefore if they have collected a few extra dollars, they can easily make a payment to their mortgage principal without any interest.

This also holds true for those who may have recently gotten a raise in salary, or even won the lottery or gained an inheritance. Naturally what they may want to do is make a bigger monthly payment. This open mortgage has the benefit of making any extra payments towards paying the loan in a shorter time.

The more paid to the principal, then the lesser amount of interest that the borrower will eventually pay.

The Down-Side of Open Mortgage

variables vs fixed mortgage ratesThe main bit here is that the rate of interest on the open mortgage is usually just a bit higher than that of a closed variable or fixed rate mortgage. This should be discussed with your mortgage provider or broker who gets paid to advise you on these. They can help identify your financial position today and maybe some future projections.

Benefits of A Closed Mortgage

The closed mortgage may on fuller inspection of your financial situation today and even in the near future, be to your advantage. If after sitting with your financial advisor and you do not intend to place your property on sale in the immediate nor foreseeable future, then this might be the better option. This can also work for the person who has no intention of prepaying the mortgage above what is allowed. A closed mortgage works as well for those who do not plan to refinance their mortgage. 

Closed mortgages also tend to come with a lower initial rate on the mortgage. This may be the key thing some are looking for, as they acquire their property. Additionally, with the right timing, you can capture mortgage rates at their lowest interest payments and lock them in over the term.

The Down-Side of Closed Mortgage

As mentioned we remind you that there would be a penalty if you prepay your mortgage over and above the prescribed amount. 

Consult Your Financial Advisor

considering mortgage optionsAs you start your journey to find a better mortgage rate, ask about a closed mortgage with a variable rate. Almost like a taste of both options. Closed mortgages with a variable rate usually have lower prepayment penalty. This is in comparison to closed mortgages with a fixed rate. This works to your advantage if you come into a financial lump sum, then it can work that your penalty for any prepayment is lowered.