What Is an Open Mortgage?

An open mortgage is a type of mortgage that allows you to pay off your mortgage in part or in full at any time without prepayment penalties. Unlike traditional closed mortgages, an open mortgage lets you pay off your entire balance or make additional payments whenever you want. 

While open mortgages offer more freedom, they typically come with higher interest rates than a closed mortgage, so they aren’t the best option for most people. 

If you have 35% or more equity in your home, a Home Equity Line of Credit, or HELOC typically has the same benefits as an open mortgage with reduced cost. 

Key Takeaways

• Open mortgages allow you to make higher payments or lump sum payments without penalties.

• Open mortgages usually have higher interest rates than closed mortgages.

• HELOCs can be an alternative to an open mortgage

• Speak with a mortgage broker to see if an open mortgage fits your needs.

The Definition of an Open Mortgage

An open mortgage is a type of loan that offers repayment flexibility. Typically, mortgages are closed mortgages, meaning you agree to pay a specific mortgage payment every month for a certain amount of time. 

If you pay more than this amount, meaning if you paid off a large portion of your mortgage with a lump sum, then you would pay a prepayment penalty. 

With an open mortgage, you can pay off the entire balance or make extra payments without paying extra fees. The interest rate will be much higher, but an open mortgage might be worth it if you expect to have extra funds to pay down your mortgage.

Types of Open Mortgages

Open Variable-Rate Mortgages
These mortgages have interest rates that can fluctuate. Changes in the Bank of Canada's prime rate can cause your interest to go up or down. 

Open Fixed-Rate Mortgages
An open fixed-rate mortgage has a stable interest rate throughout the term. You know exactly what your minimum payments will be each month.

Convertible Open Mortgages
A convertible open mortgage starts as an open mortgage but can be converted to a closed mortgage later. This offers flexibility to pay extra initially but lets you switch to a closed mortgage with a lower interest rate down the line.

Pros of Open Mortgages

The pros of open mortgages are:

• You can increase your monthly mortgage payment without penalty.

• You can make lump sum payments toward your principal without penalty.

• You can repay your mortgage in full in the middle of a term without penalty. 

• Refinancing can be cheaper because you don't have to deal with penalties.

Open mortgages are ideal if you:

• You plan on receiving or using a large sum of money to pay off your mortgage (bonus, inheritance)

• You plan to sell your property soon and pay off the mortgage, and don’t want prepayment penalties.

• You want the ability to alter your payment amounts easily.

Flexibility is a key benefit. You can pay off part or all of your mortgage early without facing penalties. This is great if you expect a financial windfall or want to pay down debt quickly.

Early repayment options are more accessible with open mortgages. If you receive a bonus or inheritance, you can use it to reduce your mortgage balance without any extra fees.

With an open mortgage, you can refinance or renegotiate the terms whenever you need. This is useful if interest rates drop or if your financial situation changes, allowing you to secure better terms.

Open mortgages suit those who need or want the ability to make large payments or variable payment schedules to fit their financial plans. It's ideal for those who might move or sell their home within a short period.

Cons of Open Mortgages

The main cons of open mortgages are:

• Higher interest rates

• Less stability and predictability

Open mortgages come with higher interest rates compared to closed mortgages, so they only really make sense in a select few cases. 

Lenders take on more risk with the flexible terms, which is why the interest rate is higher. If you want stable payments and a lower interest rate, a closed mortgage would be a better choice.

An Alternative to Open Mortgages, a HELOC 

A HELOC or Home Equity Line of Credit is a great alternative to an open mortgage when you have 35% or more equity (or down payment) in the home.  

A Home Equity Line of Credit is a fully open, readvancable, mortgage.  You can pay any or all of the balance owed on the line of credit at any point without penalty.  

The typical price for a HELOC is Bank Prime PLUS 0.50%. This rate is typically, 1 or 2% lower than what major banks will offer for an open mortgage.  A HELOC doesn’t come with a traditional monthly payment, you are only required to pay the interest payment on the monies borrowed each month.  

To say that a HELOC is readvanceable means that you can make a lump sum payment on the amount borrowed (mortgage amount) but that equity is not then locked in your home. You can “readvance” or withdraw the monies that you used to make the lump sum payment at a later date.  

Is an Open Mortgage Right for You?

Open mortgages are less common for a reason. That said, in certain situations, an open mortgage might be your best option.

To know what mortgage type is right for you, reach out to the experienced mortgage brokers at Spire Mortgage. We’ll give you advice tailored to your unique situation.