Residential Open Versus Closed Mortgage
“Residential Property Mortgage Terminology Related To Being Opened Or Closed”
When you acquire a residential property mortgage, the actual loan from the mortgage lender is going to be open for prepayment or closed for prepayment.
And while that may sound like an either or type of scenario, there are several variations to consider.
First of a, a residential home mortgage can be fully open or partially open.
A fully open mortgage provides you to repay all or part of the mortgage at any time during the interest term without any prepayment penalty being applied.
A partially open mortgage provides the borrower with the right to pay off the loan at any time in full with a penalty of either three month’s interest, or interest differential, which ever is the greater.
Many times people assume that a fixed interest term mortgage is a closed mortgage, which may or may not be the case.
By definition, a true closed mortgage does not allow any prepayment of the mortgage during the interest term, except in cases where an arms length sale takes place.
A closed mortgage can provide other prepayment options such as increasing the periodic payment or making lump sum payments, but not full repayment during the term.
The confusion around closed mortgage options has a lot to do with how lenders describe their mortgage products with some stating that their mortgage is closed when it actually has a prepayment option, while others are truly closed mortgages in description and function.
A truly “closed” mortgage with no prepayment options is also not very common in the market place, but it still is offered by different lenders.
Some may offer it as a full stripped down options benefit to provide the lowest rate while at the other end of the spectrum, a sub prime lender may provide it as their standard offering on three and five year interest terms.
The point here is that its very important to understand the prepayment options on different mortgage offerings so that you end up with a product that meets all your requirements and does not provide an unexpected surprise in the months and years to come when you want to partially or fully prepay the principal outstanding.
The best approach for understanding the differences among an open, partially open, and closed mortgage products in the market, is to work with an experienced mortgage broker who can answer all your questions and provide proper explanation of the terms and conditions provided by a given lender or lenders.
About the Author Joe Walsh
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel