It is important that we know what an open mortgage means when we go to our bank to apply for a mortgage loan to buy a property. The truth is that it is necessary to distinguish between closed mortgages -the most common- and open ones, which although a priori have many similarities also present important differences. We are going to talk about them, their advantages and disadvantages below.
What is an open mortgage?
As we have just mentioned, there are two different types of mortgage loans. A first type would be the closed mortgage, in which the interest rate is lower and where the repayment term offered can be up to 30 or 40 years; These mortgages -the most common- are preferred by the average client, who does not expect changes in their income levels.
On the contrary, in the open mortgage, the interest rate imposed by the bank is higher and the repayment terms are somewhat shorter; but unlike the closed one, where the client can pay part or all of the loan in advance without risking being penalized, and can also borrow money -which is taken from the amortized capital- at any time and for any purpose.
With this product, the client has a line of credit equivalent to the capital already amortized, from which he can withdraw money at the same interest as he pays the installments.
We can therefore conclude that an open mortgage is nothing more than a mortgage loan. It is a product that is offered to people of great solvency and with an excellent credit history, who have a large income, or who expect to receive it in a short time. Otherwise, the procedures are very similar and the interest rate options are the same (fixed, variable, mixed, etc).
What advantages does this type of loan have?
As we have just seen, one of the main differences of this product with respect to a conventional mortgage -closed- is that in the open mortgage you can again have the money that you have paid with your installments, at the same agreed interest although with a different return period.
However, this line of credit has certain limitations. Thus, for example, when disposing of part of the amortized capital, the bank usually charges a commission for disposition, and as we have said, the credit is limited to the capital already returned with the installments; The entity will also establish a minimum and maximum term to return this capital provision.
Despite these limitations, there is an obvious advantage in these capital provisions that mortgage credit allows us, and that is that the interest rate is much lower than that of a personal loan.
Finally, another important advantage of open mortgages is that we have the possibility of adapting the amount of the installments to our convenience and of making repayments at any time without penalty, in order to lower payments or reduce the term.
What disadvantages or risks are there?
One of the main risks of this type of mortgage comes precisely from one of its advantages: and that is that by offering facilities for credit and debt, we run the risk of borrowing too much if we do not keep strict control of our finances. In addition, there are entities that change the conditions of capital provisions, depending on whether it is going to be used for investments in real estate (houses, land…) or for consumer goods (cars, etc).
On the other hand, although the interest of a capital provision with an open mortgage is much lower, in the long run, it can be more expensive than a personal loan because the repayment terms are longer, and therefore it is also the accrued interest. This is because in the dispositions the client usually extends the return period as much as possible so that the monthly installment does not skyrocket, so the interest increases and also the money to be paid.
Another important disadvantage of this type of loan is the great difficulty in carrying out a subrogation to another entity in case we want to improve the conditions. In fact, many banks put quite a lot of inconvenience when making an open mortgage subrogation -despite the fact that it is “legally” possible- so we can see ourselves “trapped” in a bank with which we do not want to be.
Is this product right for me?
The truth is that, as we have already mentioned, these types of loans are not made for the average client, since in addition to having good solvency, they require being very aware of their risks to avoid an accumulation of debts. In fact, there are very few entities that offer open mortgages, which shows that it is an option with risks for both the client and the bank.
What alternatives do we have then if we need a mortgage and at the same time have liquidity for an extraordinary expense? Well, the truth is that there are other options apart from mortgage loans.
One would be to request a personal loan, with which we can get between 40,000 and 90,000 euros at interest rates that are currently between 5 and 7%. Another option would be to request a mortgage extension, negotiating with our bank to increase the capital of the mortgage loan that we have contracted. The interest would be the one already agreed for the mortgage, although by having to make a novation we may incur certain expenses.
