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On this episode of The nestegg Podcast, host Maja Garaca Djurdjevic and three experts discuss whether owner-occupiers should withdraw from the property market, the effects of Tuesday blues on the ASX, upcoming super changes and more.

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Steve Waters, director of Right Property Group, chats about current property price movements and whether owner-occupiers are being priced out of the market.

RMIT’s senior lecturer of finance, Dr Angel Zhong, delves into the Tuesday blues effect and the implications for Aussie investors.

And lastly, tax and super guru Timothy Munro talks about upcoming super changes and shares his handy checklist ahead of tax time.

Have a question for our experts? Get in touch at [email protected] and you might get featured on the next episode.

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Borrow

Closed v open mortgage: What’s more costly?

By Louise Chan

October 29 2019
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Borrow

Closed v open mortgage: What’s more costly?

By Louise Chan
October 29 2019

An open mortgage allows you to pay off your loan in full at any time without getting penalised. This absence of a penalty for knocking down a large debt early is what attracts many to choose an open mortgage.

Closed v open mortgage: What’s more costly?

By Louise Chan

October 29 2019
Share

A closed mortgage only allows a limited amount of additional payments before you get hit with a penalty. Likewise, you’ll be required to pay a fee if you break any of the loan’s terms.

Many people think that it’s best to choose an open mortgage if they plan to pay off their mortgage early. However, some experts believe that this way of choosing may be inaccurate and could even unnecessarily increase the total cost of the loan.

Which is more costly?

Either of the two types of mortgages can be more costly than the other – it all depends on your current and future financial circumstances.

Open mortgages may give borrowers more flexibility, as well as the freedom to pay off loans early, but it does so in exchange for higher interest payments. This means you’ll be paying a higher amount regularly in exchange for the possibility that you’ll have enough extra money to put towards your mortgage repayments.

Closed mortgages, on the other hand, may charge a penalty for extra payments and paying off the loan early, but they also offer some of the lowest interest rates.

You’ll be paying your lender less money on interest even if you’re locked in to pay for a longer term. But any break in the terms of the loan, such as exceeding the allowable prepayment limit, would mean additional payment due to penalties.

To determine which type will cost you more money, you’ll have to compute how much your repayments are likely to be and how the penalties will be calculated for a closed mortgage.

Lenders generally compute the penalty as three times your monthly interest rate.

For instance, if you have a $300,000 home loan (closed mortgage) with a 2.95 per cent interest rate for 25 years, you will pay a total of $221,250 in interest over the full term of the loan ($737.5 monthly).

If you have an open mortgage with a higher interest rate at 3.75 per cent, you will pay a total of $281,250 in interest ($937.5 monthly).

If you break your closed mortgage, your penalty will be $2,212.5 on top of your full payment. Despite this penalty, a closed mortgage would still save you more money in the long run.

However, this does not apply to all loans.

An open mortgage may still save you more money if you avail the right features.

It’s best to discuss your financial circumstances and future plans with a broker so they can give you advice that is more appropriate to your circumstances.

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About the author

Louise Chan

Louise is a content producer for Momentum Media’s nestegg who likes keeping up-to-date with all the ways people can work towards financial stability in 2019. She also enjoys turning complex information into easy-to-digest, practical tips to help those who want to achieve financial independence.

About the author

Louise Chan

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