An open mortgage is a type of mortgage term where the borrower has the flexibility to pay the full mortgage early without any prepayment penalty.
Open mortgages can come in the form of a line of credit, or a lump sum mortgage amount, whether newly or previously registered.
Given the flexibility of not having a penalty for breaking an open mortgage, the interest rates are typically higher when the mortgage or line of credit is open. It’s also important to note the
interest applied on open terms is usually calculated per diem (per day) of usage of the funds.
How Interest Payments Are Calculated On Open Mortgages
For example, if you borrow on an open mortgage term of $100,000 with an interest rate of 3.5%, the total interest for the year (12 months) would be $3,500. If you borrow $100,000 and pay the full amount back in 30 days, to get the per diem interest for 30 days, divide $3,500 by 365 days to get the per diem of $9.5890410959, then multiply by the 30 days the loan money was used for, and the total interest for 30 days is $287.67.
Although the interest rate is higher, it may be advantageous when keeping the loan for a short term while making interest-only mortgage payments and paying off the mortgage at any time without any prepayment charges.
Open Mortgage Variable Interest Rates
Variable interest rates with open terms are attached to the prime rate, similar to how it works with closed variable interest rates, however on open mortgages the rate is above the prime rate, whereas on the variable closed mortgage, the rate is discounted from the prime rate.
Open Mortgage Fixed Rates
Fixed-rate open mortgages are most common when a homeowner has surpassed their mortgage maturity date without having renewed with their existing lender and not having paid out their current lender in full, whether through the sale of property or refinancing with another lender.
In many cases, when a homeowner doesn’t renew with their existing mortgage lender(s) and the mortgage has reached past the maturity date of the mortgage without being paid out in full, the mortgage will go into a fully open mortgage for 6 months automatically. This is most commonly seen in institutional or schedule A, and bank-issued mortgages. Borrowers are still required to make regular payments to their lender, however usually at a higher interest rate until the mortgage is paid off in full.
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