Open Mortgage vs Closed Mortgage
The difference between an open mortgage and a closed mortgage lies mainly in its payment terms. An open mortgage allows the borrower to pay it off any time, without penalty. On the other hand, closed mortgages refer to a locked system, where you are committed for a certain period of time. In this situation, you are not allowed to pay off your mortgage under any circumstances except when you sell your property.
There are a lot of other differences between the two. An open mortgage normally is offered for a shorter period and for a higher interest rates compared to closed mortgages of the same duration. The term of such mortgages varies from six months to one year.
A closed mortgage option does not give the freedom to negotiate or refinance the mortgage before the end of its tenure. In case the buyer has to renew it, he will have to pay the penalty too. The penalty associated with the closed mortgages is very high. Normally the mortgage lender charges you a three-month interest or the Interest Rate Differential, whichever is more.
Fixed rate mortgages are the popular type of closed mortgages. They are offered for different periods ranging from 6 months to 25 years. Some of these mortgages allow early pay down options, though they are still considered as ‘closed.’ Many closed plans thus offer the facility of an open system through different pre-payment options.
Advantages of closed mortgages:
- There are convenient periods to choose from, a minimum 6 months to maximum 25 years.
- Interest rates are less compared to the open mortgage plans.
- Some of the closed mortgages offer accelerated payment options. This facility enables the buyer to pay off the principal in weekly or bi-weekly payments, as per the convenience of the buyer.
- It is a secure plan, as it does not pause any risk due to the vulnerable market conditions.
Advantages of open mortgages:
- It is a flexible plan. If you want to free yourself from the loan, you can do it without any penalty.
- If you choose a variable-rate plan, you may get a term up to 2 years.
- Even though the interest rates are high, you can save a good amount as the tenure of the loan is shorter and if you try your luck at the variable-rate plan, you may get your interest further reduced in favorable market conditions.
Closed Variable vs Closed Fixed mortgages
The closed variable mortgage can be chosen for it offers the following advantages:
- As the interest rates vary, you can save a considerable amount on the interest compared to the fixed-rate plans.
- Some mortgage companies offer pre-payment options throughout the year depending on your financial status. Different companies offer different limits for the maximum payments.
- Many mortgage companies allows you the flexibility to switch the plan to closed or fixed-rate.
The closed fixed mortgage offers the following advantages:
- It offers a stable financial position throughout the mortgage tenure without causing worries to your financial plans.
- It offers the lowest risks, especially in a volatile market conditions
Open Variable vs Open Fixed mortgages
The following are the advantages of the Open Variable mortgages:
- You can repay your mortgage if you feel the interest rates are soaring. On the other hand, you can save money to your principal through your monthly payments if the interest rate is very low.
- You can repay your loan by paying up to 100% if you are in a good financial position. There is no penalty for repaying the mortgage.
- You may sell your home in the near future, without waiting for the loan tenure to be over.
Advantages of Open Fixed mortgages:
- You have the security of a fixed interest rate and at the same time the flexibility to pay off the loan anytime you wish.
- You may sell your home without waiting for a long time.
- The short duration offered makes you debt-free quickly.
Comparing the two mortgage options, open and closed, we can say that each has its own merits and demerits. It is better to go for a plan that suits your financial conditions than that depends on the market conditions. Open mortgage options are suitable for those who want to relieve themselves from the loan quickly. On the other hand, closed mortgage is for those who can afford the interest rate for a longer period in their life.