“Opened” versus “Closed” Mortgages
April 23, 2009 9:52 am Case Study, First Time Home BuyerOne of the common questions I get when working with my customers is “What is the difference between open or closed mortgages?”
These terms are thrown around alot and people sometimes are confused about them. I am not suggesting that the terms or what they describe are complex – just that people are not always aware.
Open mortgages are mortgages that can be paid off at any time without a penalty. The can either be for a set amount or can have floating balances (like a credit card). The two most common reasons a person would want an open mortgage is if they knew that they were about to come into some big money and wanted to apply it to the mortgage – like the sale of a house, a big bonus from work or winning the lotto. They may also have their mortgage as open if they have a line of credit that is secured against their property.
Closed mortgages are mortgages that if paid off before their allotted term incur a penalty. So for example if you were to win the lotto and pay off your house the next day then you would incur a penalty. Or in a more likely situation if you were to refinance before the term of that mortgage was up then you would likely pay a penalty.
So by the definitions – many people say, “lets go with the open option just in case”. Lenders want to encourage people to go with fixed terms so they increase the rates on open mortgages or reduce the number of terms that are available to use this product (for example 6 months and one yr instead of 1 yr, 2 yr, 3 yr, 4 yr, 5 yr, 7 yr and 10 yr that fixed mortgages offer).
I always suggest to my customers that if they are not expecting a large sum of money in the next 12 months but still want to make extra payments to pay down their mortgage faster then take advantage of the pre payment privileges that most lenders offer.
I will discuss those options further in a future blog post.
All the best and please feel free to call if you have any questions.
