Closed v open mortgage: What’s more costly?
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.
About the author
About the author
Loans
Looking for a loan pre-approval? Here are 5 things you need to know
Applying for a mortgage pre-approval can be a real boost for anyone looking to purchase property – but it’s important that would-be home owners do have a good understanding of what a pre-approval ...Read more
Loans
The remarkably simple way to pay off your mortgage sooner
For those looking to get out of debt quicker, a mortgage broker has explained a remarkably simple trick to pay off a home loan sooner. ...Read more
Loans
4 little-known benefits of using a mortgage broker
Mortgages can be confusing at the best of times. Add in a myriad of lenders offering different rates with various benefits, plus an extremely cautious banking system, and it may be easier to get an e...Read more
Loans
Big 4 bank estimates 15k customers cannot pay mortgage
One of Australia’s big four banks has estimated that up to 15,000 of its mortgage customers may not be able to resume repayments, as the bank begins a two-month engagement process to assess the impa...Read more
Loans
Banks call customers as mortgage deferral period ends
A small but growing number of borrowers who have put their mortgage or business loan on hold during the COVID-19 pandemic are beginning to pay their debts as the first six-month deferral period comes ...Read more
Loans
How risky is Australia’s household debt?
The central bank has warned house prices could plummet in the event of severe economic slowdown, but it would only trigger a small increase in the share of mortgages at risk of defaulting. ...Read more
Loans
How long should I expect to be paying off a commercial mortgage?
How many years is the average commercial mortgage term? Find out how you can get the best term length that suits your needs. ...Read more
Loans
Why it pays to have a principal and interest loan
Owner-occupiers who are paying principal and interest on their mortgage are being rewarded by financial institutions with a lower interest rate. ...Read more
Loans
Looking for a loan pre-approval? Here are 5 things you need to know
Applying for a mortgage pre-approval can be a real boost for anyone looking to purchase property – but it’s important that would-be home owners do have a good understanding of what a pre-approval ...Read more
Loans
The remarkably simple way to pay off your mortgage sooner
For those looking to get out of debt quicker, a mortgage broker has explained a remarkably simple trick to pay off a home loan sooner. ...Read more
Loans
4 little-known benefits of using a mortgage broker
Mortgages can be confusing at the best of times. Add in a myriad of lenders offering different rates with various benefits, plus an extremely cautious banking system, and it may be easier to get an e...Read more
Loans
Big 4 bank estimates 15k customers cannot pay mortgage
One of Australia’s big four banks has estimated that up to 15,000 of its mortgage customers may not be able to resume repayments, as the bank begins a two-month engagement process to assess the impa...Read more
Loans
Banks call customers as mortgage deferral period ends
A small but growing number of borrowers who have put their mortgage or business loan on hold during the COVID-19 pandemic are beginning to pay their debts as the first six-month deferral period comes ...Read more
Loans
How risky is Australia’s household debt?
The central bank has warned house prices could plummet in the event of severe economic slowdown, but it would only trigger a small increase in the share of mortgages at risk of defaulting. ...Read more
Loans
How long should I expect to be paying off a commercial mortgage?
How many years is the average commercial mortgage term? Find out how you can get the best term length that suits your needs. ...Read more
Loans
Why it pays to have a principal and interest loan
Owner-occupiers who are paying principal and interest on their mortgage are being rewarded by financial institutions with a lower interest rate. ...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
