What is an Open Mortgage?

Diane Goettel

An open mortgage is a kind of mortgage that can allow the borrower to pay off the loan balance before maturity without paying any additional charges. This kind of mortgage is often useful for borrowers who think that they might be able to pay off their mortgage more quickly than anticipated. However, the terms of this mortgage mean that the lender stands to make less money than the agreement indicates.

Through a open mortgage agreement, homeowners are able to pay off their mortgage early and without penalty.
Through a open mortgage agreement, homeowners are able to pay off their mortgage early and without penalty.

If a borrower decides to pay off a loan balance early but does not have an open mortgage, prepayment charges may be assessed. The terms of these prepayment charges should be stated in the mortgage agreement. The reason for these charges is so that the lender can offset the amount of earnings that it will lose on the mortgage because fewer payment cycles lead to smaller interest earnings. An open mortgage protects borrowers from having to pay these kinds of charges in the event that they are able to pay off the mortgage early.

With an open mortgage, the borrower can pay off the amount owed at any time without penalty.
With an open mortgage, the borrower can pay off the amount owed at any time without penalty.

It is common for an open mortgage to be coupled with interest rates that are higher than the interest rates for a closed mortgage, which is a kind of mortgage that does result in extra charges in the event of an early repayment of the loan. The higher interest rate helps the lender to offset the amount of earnings that can be lost in the event that the mortgage is paid off early. Because the interest rates are higher for an open mortgage than for a closed mortgage, it is best to only use this kind of mortgage if there is a strong chance that the mortgage will be paid off early.

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For those who plan to use the entire length of their mortgage agreements to repay their loans, a closed mortgage is usually a better choice than an open mortgage. The main reason for this is that, as noted above, the interest rates are often better on closed mortgages. This means that, in the long run, a closed mortgage will cost less than an open mortgage if the borrower does in fact take the entire length of the mortgage to repay the loan. Before choosing between an open mortgage and a closed mortgage, it is best to weigh both options and even consult with a financial adviser.

On a normal loan, such as a mortgage, borrowers must repay a specific principal amount each month plus interest.
On a normal loan, such as a mortgage, borrowers must repay a specific principal amount each month plus interest.

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