With loans in general and more specifically mortgage loans, it is possible to choose between an open or closed loan. It is important to differentiate between the two types of loans.
closed mortgage loan
This type of mortgage offers lower interest than an open mortgage. It also offers a longer-term that can reach 25-30 years. Additionally, if the lender makes a payment greater than expected, it is sanctioned. This type of loan is suitable for people with a fixed budget who do not expect changes in their income.
open mortgage loan
The open mortgage offers a higher interest rate and includes a shorter term. The advantage of an open mortgage is the possibility for the borrower to pay the loan in full or in part, without penalty. It is ideal for people planning to sell their home or hoping to cash in on some money. This type of loan allows you to borrow money when you need it and leaves you with available funds when you don’t have them.
Is an open or closed mortgage better for you?
If you find yourself unable to make additional payments on your mortgage loan, it is more convenient to choose a closed mortgage. This way you can take advantage of a lower interest rate.
The challenge lies more in the choice between a short-term and a long-term mortgage loan. In fact, your income is likely to increase over time, allowing you to pay part of the mortgage. You will have to assess if this is something you see as possible. This way you can take the option that suits you. In this case, an open mortgage loan without paying penalties.
Unexpected events may happen (for example, you get an inheritance) and you want to invest this money on top of the additional mortgage amount to save interest. Remember that depending on the type of contract you choose, you could face a fine (closed mortgage loan). The price of the fine could be greater than the interest saved. If this is the case, it is recommended to wait for the renewal of the term and make the modifications there.
Similarly, interest rates can change and you may want to change your mortgage to a fixed-rate or variable rate. These modifications could allow you to save money in the event that paying the penalty is less than the amount of interest you will pay.
In a context where the owners of a property wish to sell the same in the near future, it is advisable to opt for an open loan.
If a borrower opts for an open-end mortgage because they expect to pay part of the loan (without repaying it in full), the challenge is to calculate whether the interest saved with the additional payments is greater than the possible savings realized with a lower interest rate. interest offered by a closed loan.
What decision should I make?
Before making a decision about a loan or mortgage, an analysis should be made of interest rates, possible additional expenses, your income. It is easy to compare options as all figures are quantitative. Take your time before making a quick decision. The most important thing is to invest your money as well as possible to pay less interest.