What Is an Open Mortgage?
Choosing the right mortgage for your needs, budget, and financial goals can be the difference between saving money or incurring unexpected costs. Lenders offer a vast array of products with varying options, one of which is the choice between open and closed mortgages.
An open mortgage offers more flexibility, allowing the borrower to increase payment amounts either incrementally or as a lump sum, or pay off the mortgage early with no penalties. There are no repayment restrictions in an open mortgage.
Closed mortgages are fixed and charge a penalty if the borrower wishes to make a lump sum payment or pay off the mortgage early. Closed mortgages are more common among borrowers for their competitive interest rates. However, there are benefits to opting for an open mortgage as opposed to a closed one.
Benefits of an Open Mortgage
Repayment flexibility may be ideal for certain borrowers. If you’re expecting an injection of income, either from a wage increase, inheritance, or if you’re self-employed with fluctuating income, you may wish to choose an open mortgage. With this type of mortgage, you’ll be able to use that extra income to pay down your mortgage principal without penalty.
In another scenario – if you are close to paying off your mortgage entirely, an open mortgage could be the right choice for you. Having the ability to add lump sum payments to your mortgage without penalty, as well as increasing regular payment amounts will help pay off your mortgage sooner. And although open mortgages come with a higher interest rate, if you’re close to paying off your mortgage the benefits outweigh the interest incurred.
An open mortgage is a smart choice if you plan to sell your home sometime during the current term of your mortgage. You won’t be tied to selling your home at a certain time, such as within the last year of your term, to avoid penalties since there are none.
Is an Open Mortgage Right for Me?
This type of mortgage is typically offered at a higher interest rate than closed mortgages, often at least 1% more than fixed closed mortgages. It’s worth exploring how much interest you will incur over the term of the mortgage and weighing it against the increased payments or lump sum you intend to apply within that term.
Open mortgages are offered with shorter terms – usually under five years – but because of the flexibility of this product, the borrower doesn’t have to hold it until its maturity. If you have made your additional payments or find a change in your financial status, it is simple to convert your open mortgage into a fixed closed mortgage for better predictability and a lower interest rate.
An open mortgage is a great solution for property investors who may be looking to create equity faster to use toward the down payment on another property. It also benefits investors looking to sell a property in the short term to build their portfolio.
If you have a limited budget and aren’t expecting to be able to make lump sums or increased regular payments, a fixed closed mortgage may be a better solution for you.
An open mortgage allows you the freedom to pay down your mortgage faster with flexible repayment options. For specific borrowers, this mortgage type can save you thousands of dollars in interest and help pay off your home much sooner than a closed mortgage. Be sure to speak to a mortgage specialist and weigh the benefits and risks of an open mortgage to learn if this mortgage type is right for you.
Photo credits: depositphotos.com
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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