What is an open-ended mortgage?
An open-ended mortgage is a type of mortgage that allows the borrower to later increase the amount of mortgage capital outstanding. Indefinite term mortgages allow the borrower to return to the lender and borrow more money. There is usually a dollar limit on the additional amount that can be borrowed.
Indefinite term mortgage explained
An open-ended mortgage is similar to a term loan with deferred drawdown. It also has characteristics similar to revolving credit. Indefinite term mortgages are unique in that they constitute a secured loan agreement against real estate with funds intended only for investment in the property.
The application process is similar to other credit products and the terms of the loan are determined by the borrower’s credit rating and credit profile. In some cases, co-borrowers may have a greater chance of approval for an open-ended mortgage if they have a lower risk of default.
Indefinite term mortgage structuring
Indefinite term mortgages can give a borrower maximum capital for which he can obtain over a specified period of time. The borrower can take part of the value of the loan for which it has been approved to cover the cost of housing. By taking only part of it, the borrower can pay lower interest, since he is only required to pay interest on the outstanding balance.
In an indefinite mortgage, the borrower can receive the principal of the loan at any time specified in the terms of the loan. The amount available to borrow can also be linked to the value of the house.
Unlike a deferred drawdown term, an indefinite mortgage borrower usually does not have to overcome specific hurdles to obtain additional funds. Funds are generally available for a specified duration, which makes the credit account different from revolving credit, which generally remains open indefinitely, unless a borrower defaults. In an indefinite mortgage, the drawdowns on the available credit can also be used only against the guaranteed guarantee. Therefore, payments must go to the real estate for which the lender has the title.
For example, suppose a borrower obtains an indeterminate mortgage of $ 200,000 to buy a house. The loan has a term of 30 years with a fixed interest rate of 5.75%. They receive capital rights of $ 200,000, but do not have to take the full amount at one time. The borrower can choose to take $ 100,000, which requires paying interest at the rate of 5.75% on the outstanding balance. Five years later, the borrower can take an additional $ 50,000. At that time, the additional $ 50,000 is added to the principal owing and they begin to pay 5.75% interest on the total outstanding balance.
Benefits of open-ended mortgages
An open-ended mortgage is advantageous for a borrower who is entitled to a higher amount of capital than that which might be necessary to buy the house. An open-ended mortgage can provide a borrower with the maximum amount of credit available at an attractive loan rate. The borrower has the advantage of drawing on the capital of the loan to pay for any real estate costs that arise during the life of the loan.