OPEN ENDED MORTGAGE LOAN: HOW IT WORKS AND KNOW ITS PROS & CONS
Sometimes people also look for a type of debt where the borrower needs not to borrow lump sum money at one shot. Instead, there is an ease of borrowing money. Although it may sound impossible actually, it is possible. Nowadays, with the advancement of financing, different types of lending practices have started.
Among them, an open-ended mortgage loan is one that completely differs from the idea of the traditional mortgage loan. Unlike the previous type of mortgage loan, a borrower needs not to take the lump sum amount of money at once. Instead, one can borrow as much as he requires.
Indeed, it sounds so exciting, and you can easily avoid the possibility of having too much burden of debt over your shoulder. But according to financial experts, it has some flaws. Borrowers may find out multiple advantages of this type of borrowing. However, let us know more about this open-ended mortgage loan.
What is an open ended mortgage loan?
A special type of house loan through which the borrower can utilise the fund as per his need to build the property is known as open-ended mortgage debt. For instance, if you are purchasing a property and you are in need of money for only land registration, then take that much monetary help from the lender. If you also want to purchase a property, still you can apply for such a mortgage loan.
So, the borrower can quickly increase the amount of borrowing even after completing the loan application. As a result, the borrower can easily purchase his dream home without having any financial trouble. However, while increasing the loan amount after approval of a minimum borrowing amount comes to another essential concept, i.e. Home Equity Line of Credit (HELOC).
A simple example can clarify the concept of HELOC in the open-ended mortgage loan. For instance, you selected a property worth 300000 Pounds. But you can qualify for 400000 Pounds mortgage loan. Now, in this case, you can easily borrow only the amount required for purchasing property and pay the necessary instalments on 300000 Pounds.
How does Open-Ended Mortgage Operates?
Before we start elaborating on how open-ended mortgage operates, let me tell you its actual status. This new type of mortgage loan is just like a hybrid debt instrument and an in-between condition of the traditional mortgage loan and Home Equity Line of Credit.
- To borrow this debt, you need to appeal for the highest available amount against your profile. After applying for this loan, the lender will go for background verification. If you want to borrow even a 1000 pound loan, then borrowers used to run background verification.
- If the verification result comes positive, then the borrower can get the highest loan amount. Generally, the borrowers of open-ended mortgage loans used to own only the required amount to purchase the property or build the house. Now, it is ultimately the borrower’s choice whether he needs to borrow the entire available debt limit or not.
- Rest of the pre-approved amount one can easily use to decorate the interior of the house. By thinking about the situation of property purchasers, such facility is given to the borrowers.
- After borrowing a particular amount, now it is time to repay the outstanding loan. When a borrower pays the outstanding loan ultimately, then he can borrow again.
- The highest amount of loan up to which you can borrow ultimately depends upon the value of your property. This is because the newly purchased property is under the hold of the lender.
Pros of borrowing Open-Ended Mortgage Loan
According to lots of borrowers, this type of mortgage loan is better than the traditional one. They used to site ample reasons behind it. These include,
- Low-interest rate
Unlike any other mortgage loan, an open-ended mortgage loan also does not charge a very high rate of interest. As the lender used to get a completely new property in the form of a mortgage, he does not impose a very high-interest rate.
- Ease of borrowing
The process of borrowing money through this loan is very simple. One can easily borrow money as per the requirement, which is utterly impossible for a traditional mortgage loan. After borrowing only the required amount, a borrower can easily keep the rest of the amount for later borrowing.
- Long repayment period
Secured loans always come with a long repayment period. Unlike other loans, this type of open-ended mortgage debt comes with a long repayment period. As a result, one can quickly repay the amount within a limited period.
Cons of borrowing Open Ended Mortgage Loan
However, some finance experts used to bring the flaws of open-ended mortgage loans. These are:
- There is a limitation of borrowing
It is not that you can borrow only up to a limited amount, but the application times have some limitations. Although there is a scope of borrowing multiple times, you can’t use this facility as much as you want. There is a limitation, and within a time period, you can claim another debt.
- Not everyone sanctions this new type of loan
It is an entirely new type of loan, so every lender will not sanction this type of loan. So, if you want to borrow this loan, you must find a lender who will offer open-ended mortgage debt.
These are some cons of borrowing an Open-Ended Mortgage Loan. Before applying for it, know briefly about them clearly.
Ailsa Adam is the Editor-in-Chief and former content head at Hugeloanlender. She has been a valuable member of the content strategy team since 2017 due to her abundant experience in the finance sector. Passionate about helping individuals navigate the world of loans and personal finance, she has dedicated herself to acquiring extensive knowledge on various financial products. Before her role at Hugeloanlender,
Ailsa worked as a seasoned journalist and writer, specialising in creating informative blogs and articles on diverse loan types. She is known for her meticulous research and commitment to delivering accurate and engaging content. She holds a degree in MBA Finance and has a keen interest in creative writing and art.
