An open mortgage is one where the borrower can repay the loan, in full or in part, anytime prior to maturity without incurring penalties. This type of mortgage typically ranges from six months to one year. An open mortgage may be fixed or variable.
The flexibility to make payments on the principal at any time and at any amount is beneficial to those who are capable of making large sums of payments. It is also ideal for those who plan to sell their property in the near future.
The difference between open and closed mortgages
Closed mortgages have lower interest rates than its open counterpart. However, closed mortgages have stiff restrictions regarding how much of the mortgage you can pay off. Typical prepayment options on a closed mortgage are allowable up to 20% of the original mortgage amount, but vary from lender to lender.
Most Canadians have closed mortgages opting for the reduced flexibility at a lower rate.
Why Choose an Open Mortgage?
Home owners who are seeking to pay off their debt faster will benefit the most from an open mortgage. It also benefits investors who flip properties for profit.
However, given the significant interest premium on open mortgages, if you do not expect to move in the immediate future and your income remains relatively fixed, a closed mortgage may make more sense.