What is an open mortgage?

Whether you’re currently renting, living with family, or you’ve already purchased a home in the past and are thinking about moving to somewhere new, there are a lot of choices to consider when it comes to your mortgage.

Soon, you’ll be sweeping your steps, planting a garden, painting your living room, and all of the other moments that come with homeownership. However, it’s important to learn about some of the different terms you’ll come across and how much of a significant impact they can have on how much you end up spending overall in the property-buying process.

With so many different options and types of mortgages to choose from, it’s no wonder why many people get confused when shopping for mortgages. Sometimes, you can feel pressure from your banker to a point where you aren’t really sure if they’re there to inform you of all your options.

We’re here to help demystify things and answer the question that many people ask us—which is as follows: what is an open mortgage?

Let’s get to the bottom of it all right now. At the end of the day, it’s about choosing what works best for you and not what works best for the person trying to sell you the mortgage.

What exactly is an open mortgage?

An open mortgage keeps the door open for you to pay down your mortgage sooner rather than waiting to make each individual payment at the assigned time throughout the full length of your mortgage.

Mortgages come with many different terms and conditions. These rules dictate the rate you’ll pay in interest, when it’s time to renew your mortgage, when you can renegotiate, and what the penalties are if you decide to make extra payments with the goal of paying off your mortgage early.

The amount of money that you pay for your mortgage will be dictated by these terms. There’s a difference in the cost between open and closed mortgages in that you pay a premium for the ability to end your mortgage sooner with an open mortgage.

What are the advantages of open mortgages?

The main advantage of keeping your mortgage open is the ability to pay it off all at once should you come across a lump sum of money at some point. You’ll have to pay higher interest for this privilege, but it can still be worthwhile for anyone who wants the freedom to pay off their mortgage more quickly, or even all at once, without penalty.

Some homeowners use an open mortgage to act as a bridge to cross the gap of time between selling their previous home and buying a new one rather than risking ending up in limbo between getting the proceeds from their sale and purchasing their next home.

They’ll be in a better financial position after selling the first home and may want to put a large portion of the proceeds towards the new home, so being able to make a large payment without getting sucked into years and years of worrying about interest rates can be very beneficial. A mortgage broker will be able to help sort out all of the details, but this type of maneuver isn’t possible with closed mortgages.

An open mortgage can also be beneficial when you’re dealing in investment properties—especially if you plan to fix them up and sell them again in a relatively short time period. The interest rate during that time won’t play as large of a role because you’re adding a lot of value to the property and selling it within a short amount of time without having to worry about carrying a long-term, closed mortgage. You can flip the property and pay off the mortgage balance without penalty.

What are the disadvantages of open mortgages?

Depending on your situation and your long-term plans, an open mortgage isn’t always the best idea. The first disadvantage of an open mortgage is that you’ll pay a higher interest rate. If you don’t plan on making any large payments and you plan on living in your home for the foreseeable future, then the advantages of an open mortgage won’t really matter to you and will be outweighed by the advantages of a closed mortgage.

Over time, the cost of borrowing with an open mortgage will be greater than a closed mortgage—assuming you aren’t making any additional large payments or moving soon.

Mortgage rates are a very important consideration to keep in mind. A small change in the interest rate can add up to be a lot over time.

How is an open mortgage different from a closed mortgage?

Keeping the aforementioned advantages and disadvantages in mind, a closed mortgage means that you will face penalties if you want to pay it off early. Since a closed mortgage usually comes at a lower cost, the bank or lender wants to ensure that they’re earning enough profit off of your mortgage to justify the risk. If you pay it off early, then that’s less time for them to collect interest. Therefore, they make up for that possibility with a higher rate for an open mortgage.

Even a small difference in the percentage between an open and closed mortgage can add up to thousands and thousands of dollars over time, so it’s worth carefully considering which option makes the most sense for you. A mortgage broker can help explain the differences and to run the numbers for your unique situation, too, so don’t hesitate to contact a mortgage broker to learn more.

What is the best option?

The best way to answer this question is to understand that there’s a market for both types of mortgages—whether you want to run the full term or pay off your mortgage balance early with a lump sum. With closed mortgages, your options will be a lot more limited, but you’ll also pay lower interest rates.

What are some quick facts about open mortgages?

  1. Keep your mortgage open if you plan on paying it off early, making large payments, or plan on selling the property in the near future.
  2. Mortgage rates are a good metric to use when you shop around, but the specific terms can impact your total costs even more.
  3. Mortgages can be open, closed, fixed-rate, variate rate, and can have a number of other traits. There are no right or wrong choices—it really just depends on your situation.
  4. When you’re moving, an open mortgage can be used to bridge the gap so you don’t experience any time without the money needed to buy your next home.