How to Choose an Open or Closed Mortgage

Posted on 5th December 2019
Tags: mortgage, Open vs Closed Mortgages,

An integral part of buying a home is planning. There are many things to plan for, the physical activity of moving to a new home such as packing and transferring your worldly goods. There’s planning what to do with your new home, how to bring your own touches to the decoration and the fittings and there’s planning what mortgage is going to be appropriate to support your purchase. Open or Closed?

Open or Closed Mortgages offer different advantages to borrowers, dependent on their situation now and what they have planned for the future.

The Open Mortgage

In the most straightforward terms, an open mortgage is one that is eligible for early repayment and has a shorter term than a closed mortgage. The reason for pairing shorter terms with early repayment options is that open mortgages are designed to be a transitionary type of loan. 

For example, Claire and Robert have decided to buy a home and move in together. The sale of their current, individual, properties will garner enough cash to pay off most, if not all, of the mortgage on their new home. This means they have some cushioning between buying their new home and selling the old ones.

As a rule of thumb, lenders in this situation will overtest the means of borrowers. While the open mortgage they apply for might have a 3% interest rate, the lender will test Claire and Robert’s finances to see if they could tolerate a 6% interest on their loan. Not because they will want to increase the rate, but because the risk involved in waiting for Claire and Robert to sell their properties means there might be an impact on their ability to pay.

It is worth noting that if you plan to get an open mortgage, this comes with a greater degree of financial testing scrutiny, and this should form part of your planning, particularly in what documentation you prepare for a potential lender regarding your financial history. 

A Closed Mortgage

As you may already have anticipated, a closed mortgage does not offer the same kind of flexibility, so why would anyone choose a closed mortgage? 

Most people are not in Claire and Robert’s situation, where they can anticipate a windfall within the term of the mortgage. For those people, a fixed-rate closed mortgage with a defined payment schedule works better because it matches their income. Regular, predictable, income feeding defined scheduled payments. 

If you do think you might get a windfall during the payment scheme, an increase in salary, a return on an investment, or perhaps an inheritance, discuss with your lender what overpayment policy might potentially be included in a closed mortgage product. This will reduce monthly payments, but lenders will almost certainly penalise you for early repayment of the principal debt. This penalty is usually based around the remaining interest on the term as this is what a lender is expecting to get from you in exchange for the loan over the full schedule. Make sure you understand how this penalty is calculated before you commit to a loan.

Needless to say that with a closed mortgage there are also planning considerations to make in advance both around what is predictable for your circumstances and what might be unexpected.

Making the Choice

Predicting the future is best left to futurologists and precognitive psychics. If you want to get the most out of your future and out of an open or closed mortgage, the path to success is laid with advance planning. But even if you make your plans, predict your budgets, and outline your five-year-future, you still have to go to multiple lenders, one-by-one to try and find a lender whose products meet the goals of your plan.

At all of our experts are independent. They aren’t beholden to us or any of the hundreds of lenders they have access to through us. They can use their expertise to help you really refine your planning and use that plan to find the right mortgage product for you, whether open or closed.

To find out more, contact today and start planning for a better financial future.

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