What is an open mortgage?

The open mortgage is a type of mortgage that can allow the debtor to repay the loan balance before the maturity without paying any other fees. This kind of mortgage is often useful for debtors who think they could be able to repay the mortgage faster than expected. However, the conditions of this mortgage mean that the creditor is to earn less money than the agreement suggests.

If the debtor decides to repay the loan balance in time, but does not have an open mortgage, the overpayment fees may be assessed. The terms of these preparation fees should be specified in the mortgage agreement. The reason for these fees is that the creditor can equalize the amount of income that loses on the mortgage, as fewer payment cycles lead to less interest earnings. The open mortgage protects the debtors from having to pay these types of fees if they are able to repay the mortgage soon.

It is common that an open mortgage is associated with interest rates that are higher than the interest rates behind uA closed mortgage, a type of mortgage that leads to other fees in case of early repayment of the loan. The higher interest rate helps the creditor to compensate the amount of earnings that can be lost if the mortgage pays off early. Because interest rates are higher for an open mortgage than a closed mortgage, it is best to use this type of mortgage only if there is a strong chance that the mortgage will be paid soon.

For those who plan to use the entire length of their mortgage agreements on repaying their loans, a closed mortgage is usually a better choice than an open mortgage. The main reason is that, as mentioned above, interest rates are often better on closed mortgages. This means that in the long run, the closed mortgage will cost less than an open mortgage, if the bank actually takes the entire length of the mortgage to pay off the loan. Before choosing between an open mortgage and a closed mortgage, it is best to consider both options and even consult with a financial advisor.