The reasons that a long term mortgage stays viable is due to portability, as the mortgage can be transferred, however, it is the concept of "convertibility" that ensures the viability of a short-term mortgage. All borrowers in any market have the convenience to "lock-in" to a long-term fixed-rate mortgage through before maturity though the option of a short term mortgage.
Borrowers have traditionally found it hard to decide when it comes to opting for a long-term or a short-term mortgage. When borrowers have made a decision to choose the short-term option, they have to make another trying decision - whether to opt for the closed or open mortgage. The cheaper of the two options is to go in for a closed mortgage; however, borrowers choosing this option are forced to sit on the sidelines after the mortgage is booked till it came time for renewal, usually in six months or a year's time. Choosing the open option permits borrowers to do far more before the mortgage matures - they can go in for a renewal, they can choose to refinance, or retire -at the price of facing much higher interest rates on the mortgage. The most important factor to consider is to find out exactly, what it is that most people want in a short-term open mortgage? Presuming they choose to opt for one. This factor is the right to convert to a longer-term mortgage when the rates go up in the future.
The option of convertibility ensures that borrowers have the greatest flexibility and security on their mortgage; it allows them the chance to play both ends against the middle in terms finances. The convertible mortgage is a hybrid or mixed type of mortgage option that basically offers borrowers all the short-term open features, such as the option to lock-in to a longer fixed rate mortgage, with the benefit of costing only as much as a short-term closed mortgage - there is one essential difference. This can be called the sacrifice, which means that borrower loses the ability to switch lenders if borrowers decide to lock-in before the mortgage becomes due - in other words, the borrower is stuck with the same lender. So if they decide to convert before maturity, it must be with the same lender. This can be further explained this way, when a mortgage is fully open, it is also considered convertible; however, if it's only convertible, it is not fully open. However, many borrowers consider this factor a small price to be paid for the benefits that a convertible mortgage gives them.
Convertible mortgages are unfortunately not classified under any standard or common definition. A lack of definition and standard is also true of other features such as the concept of portability and early renewal of mortgages. The criteria are largely left to the lenders to define in their own terms, as different lenders tend to have different convertible terms and requirements from their customers. However, it is essential to know exactly what a mortgage says is all about, especially if the buyer wished to preclude encountering any unpleasant surprises at a later time.
Perhaps the question that needs asking is to what extent, convertible mortgages differ from one lender to the other? The majority of lenders will not force their borrowers to lock-in to a longer term before the expiry of the initial six months. The lenders may use the lock in privilege; however, they generally do not employ this device in most markets. When the device is not used, on maturity of the term, the borrowers can go in for renewal for any term they want. This can include another six- month convertible term, or they can even switch lenders in the market. However, for some lenders, the presence of the convertible clause will force borrowers to renewal of the term before the expiry of the first six months, usually the renewal will be for a term of that can reach a maximum of five years - this in essence is not what the majority of borrowers can expect from a convertible mortgage that are offered by most lenders.
Another important issue to ask is whether the conversion occur at any place or at any time, or only on the particular date of payment? This later fact is not of much use if the rates start to soar in the middle of the month.
One other issue to be considered is what occurs when the conversion feature is started before maturity? In this case, for how long is the borrower placed in lock-in? The majority of lenders in the market will allow their borrowers to have a choice on their own term, usually the choices given are to extend for a minimum of a year to a maximum term of five years. This also depends on the lenders, as many other lenders have lower or higher minimums when they offer terms to their borrowers.
The majority of lenders in the market also claim convertibility for the mortgages they offer, similar to the portability they also offer; nevertheless not many lenders are willing to put this in print. For all borrowers regardless of their level of knowledge, it must be advised that it is risky to rely extensively on the lender's "policy", this is because there are no guarantees that such a policy will still be around if and when the borrower decides to convert.
Many lenders also take to the idea of convertible mortgages with enthusiasm, though it is mostly the borrowers who are the happier with convertible mortgages. It has become very difficult to maintain clients for long periods of time, particularly because short-term mortgages have gained such popularity with the buying public and also due to the switch or transfer - in option that's now commonly available on the maturity of a mortgage. Many leading lenders in the market have ensured they retain clients by giving borrowers the most important features of a short-term open mortgage at the short-term closed rate. This measure is an effective way in which leading lenders retain most of their clientele and it tends to encourage clients to commit to far longer terms in periods of rising interest rates across the market.
