What is an Open Mortgage?
An open mortgage is a mortgage that permits repayment of the principal amount at any time, without penalty. Repayment terms are more flexible than a closed mortgage, which do not usually allow for prepayment without penalty.
Example of an open mortgage
MCAP provides a very flexible open mortgage product called FlexStar. With a FlexStar mortgage, the borrower is permitted to make interest only payments for a certain period of time, make additional payments without penalty, pay extra towards the principal (up to 50% of the mortgage for the first 5 years and any or all of the principal after 5 years), and redraw funds on the amount already paid towards the mortgage.
ADVANTAGES OF AN OPEN MORTGAGE
Open mortgages can be very beneficial for people with income that varies, such as many self employed borrowers. If a self employed individual receives an extra $5,000 it can then be applied to the mortgage principal without interest.
It may also be beneficial for people who are expecting an increase in income in the future, and who will desire to repay as much of their mortgage as fast as possible. An open mortgage will allow the borrower to do so, without penalty, and the more applied to principal, the less interest the borrower will eventually pay on the mortgage.
DISADVANTAGES OF AN OPEN MORTGAGE
The main disadvantage of an open mortgage is that the interest rate is generally at least 1% higher than a fixed term, closed mortgage. A borrower planning to pay extra towards the principal may offset the higher interest rate through reductions in principal. If this type of borrower has a fixed budget and cannot make additional principal payments, a lower rate fixed mortgage may make better economic sense.
At First Foundation, we understand that a thorough discussion of your current financial situation, as well as a projection of your future income, is the best way to determine which type of mortgage is best for you. With full analysis of your financial needs, we can provide you with the right mortgage product.
Related Terms:
Closed Mortgage, Fixed Rate Mortgage, Variable Rate Mortgage, Prepayment Penalty
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If you are interested in learning more about open mortgage, please feel free to contact us today!