Open mortgage

From CEOpedia | Management online

A mortgage is a contract between a lender and a borrower. There are two types of mortgages. The first is an open mortgage and the second is a closed mortgage. Open mortgages (also called open-ended mortgages) give the borrower the right to repay all or part of the amount owed at any time without incurring any additional interest or fees (P. Dale, H. Jones 2015, p. 75). This is a good solution for people who have extra money they can repay earlier, because paying off extra amounts annually for the first five years can save a lot of money in the long run. Many open mortgages have options for six months or a year and involve higher interest rates, but if you are going to pay off your mortgage quickly, it will still be a better option than closed mortgages (K. Vermond 2010). It is always possible to change an open mortgage to a closed mortgage, but not vice versa (M. Milevsky 2001, p. 3). The duration of an open mortgage is from six months to five years.

Advantages and disadvantages of an open mortgage

A closed mortgage has its advantages and disadvantages and the same is true for an open mortgage. It is not possible to choose which option is more favorable, because it is an individual matter that depends on the borrower's expectations and plans for the future. It's worth analyzing the features of an open mortgage to see if it's the right option.

Advantages of an open mortgage:

  • Flexibility - The main advantage of an open mortgage is its flexibility. At any time, if the borrower wants to transfer savings to pay back the loan, he can do so. Because of this, open mortgages are a good option for people who are able to pay off their loans quickly or are forced to do so (for example, due to plans to sell real estate).
  • No financial penalties - Unlike closed mortgages, in the event of early repayment of a loan or refinancing, the borrower does not have to worry about penalties.

Disadvantages of an open mortgage:

  • Increase in rates - The disadvantage of an open mortgage is that if rates can increase when the loan period ends. The borrower is then forced to pay a higher mortgage.
  • Higher interest rates - Due to the flexibility of an open mortgage, it is more expensive, which allows lenders to impose higher interest rates than in the case of a closed mortgage. The cost of the loan will usually be higher because of a higher interest rate.

Summing up the pros and cons, it can be said that an open mortgage is a good option for people with differentiated income as well as those who are counting on a sudden cash flow that will allow them to pay off their debts quickly. It is also a good option for people who are not sure of the near future. However, for people who do not care about paying off the loan quickly and flexibility, a closed mortgage may be a more beneficial option.

Examples of Open mortgage

  • Variable-rate open mortgage: This type of mortgage is similar to an open mortgage but the interest rate can change periodically. It is best suited for people who want to take advantage of lower interest rates. The borrower can pay off the loan any time without penalty but if the interest rate rises, the borrower must pay the higher rate.
  • Cash-back open mortgage: This type of mortgage offers a cash-back feature. The borrower can get a lump sum payment when the loan is taken out, usually from 2 to 5% of the loan amount. The loan must be paid off within 5 years or the balance of the cash-back amount will be added to the loan balance.
  • Flexible open mortgage: This type of open mortgage allows the borrower to pay more or less than the required monthly payment. This option is best for people who have irregular income. The borrower can make up missed payments in the future without incurring any penalty.
  • Convertible open mortgage: This type of mortgage allows the borrower to switch from an open mortgage to a closed mortgage without a penalty. This can be beneficial if the borrower’s financial situation is expected to improve over time.

Other approaches related to Open mortgage

An open mortgage is an advantageous option for borrowers with the means to pay off their loan early, as they can avoid incurring additional interest or fees. However, there are other approaches related to open mortgages that borrowers should consider prior to making their final decision. These include:

  • Refinancing: This means that the borrower takes out a new loan to replace the old one. This new loan is usually at a lower interest rate than the old loan, so it can save the borrower money in the long run. It can also give the borrower access to more money that can be used for home improvements or other expenses.
  • Cash-Out Refinancing: With this approach, the borrower refinances the loan for a larger amount than the original loan and takes the difference in cash. This can be a good option if the borrower needs cash for something else, such as paying off debt or making a large purchase.
  • Home Equity Line of Credit (HELOC): This is a loan in which the borrower borrows against the equity in their home and pays interest only on the amount of money they borrow. This can be a good option if the borrower needs money for something and is able to pay it back quickly, as the interest rate is usually lower than other loan options.
  • Reverse Mortgage: A reverse mortgage is a loan in which the borrower takes out a loan against the equity in their home, but instead of making payments, the lender pays the borrower a set amount each month. This can be a good option for seniors who need extra income but don't want to take on more debt.

In conclusion, there are a number of approaches available to those looking to take out an open mortgage. Each option has its own advantages and disadvantages, so it's important to consider all of them before making a decision.


Open mortgage — recommended articles
Closed mortgage — Notice account — Second chance loan — Revolving loan — Swingline loan — Refinancing — Automatic Premium Loan — Prepayment — Unsecured Note

References

Author: Agnieszka Damian

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