An open mortgage is a mortgage that allows repayment of the principal loan amount at any time, without penalty.
Open mortgages typically have higher interest rates than closed mortgages but are more flexible as they allow the owner to pay off their mortgage sooner through higher monthly payments or lump sum payments. These additional payments will lower the mortgage principal sooner, therefore lowering the interest that the homeowner will have to pay over the lifetime of their mortgage.
Open mortgages can have a fixed or a variable interest rate.
Open mortgages are important because they give homeowners with variable incomes, or those who are expecting their income to increase significantly, a way to pay down their mortgage debt sooner. They are also helpful if a homeowner knows they are likely to sell within the mortgage term as they will not require a prepayment penalty for breaking the mortgage.
Let’s say a homeowner receives a $500,000 open mortgage to purchase a home. The loan has a term of 5 years with a fixed interest rate of 5%.
After owning the home for a year, the owner gets a significant bonus and decides to put these funds toward their mortgage principal. They make this additional, lump sum payment without having to pay any prepayment fees. A year later, they get a job offer in another province and sell the home, breaking their mortgage early. Thankfully, since they have an open mortgage, they do not need to pay any penalties.