While many people consider an open mortgage to be their privilege to pay for a mortgage before it is due, actually open mortgages are those credit agreements that enclose a section permitting the payment of a single amount of money in advance over and above the recurring monthly imbursements. Although this aspect is basically considered to be an 'open' dispensation, sadly enough, numerous misunderstandings still persist regarding the 'open' perception. The confusion is primarily owing to the fact that various levels of 'openness' or 'receptivity' are present from one lender to another. And hence, it is also true that disparate lenders or creditors possess dissimilar 'open' concessions.
It may be mentioned here that for the simple reasons that a mortgage is 'open', it doesn't automatically denote that it is 'fully open'. A 'fully open' mortgage actually signifies that one is able to pay the entire mortgage sum before it is due and does not require to issue any reminder, bonus or fine. Any person looking for a mortgage to fund procurements or refinance a present credit, not only requires finding out if a mortgage is 'open' to the precise degree it is 'open'. In fact, it is advisable that one must enquire about the open aspects of a lender's mortgage plan at the very beginning, much before he or she reserves a mortgage.
Normally five dissimilar types of one-time (lump sum) payment article or sections are found in the open mortgage deeds. It is important to note here that the modifications contained by as well as among every type of open mortgages characterize the pre-payment or advance payments offerings of the different lenders. What has made things even more problematic for the borrowers or mortgagors in selecting a product is the fact that while one part of an open mortgage falls in one category, another part of the same mortgage plan is part of another category. It is important to note that since the clauses or sections pertain to pledged pre-payment, it is essential that they are mentioned in the mortgage deed. Below is an assessment or review of the different open mortgage plans in their order of benefit to the borrowers and hopefully they will prove to be helpful to anyone shopping for an ideal open mortgage product.
In the instance of an open mortgage, the borrower is able to pay the entire principal amount or a fraction of the principal in advance regardless of the date and also without issuing any reminder to the lender. In addition, the borrower also does not have to pay any penalty (fine) or bonus (extra) interest. Nevertheless, this type of mortgage also has its drawbacks - the term of the mortgage as well as the rate of interest on the principal amount. Contrary to the other forms of mortgages, a fully open mortgage is just obtainable for a brief term, normally for six months or at the most for a year. Moreover, compared to a closed mortgage with the same terms and conditions, in the instance of a fully open mortgage, the borrowers need to pay half-a-per cent or more interest on the principal amount. In fact, although some VTB or vendor-take-back mortgages do enclose a clause for paying fines on interest, most of them are arranged as fully open mortgages. Mostly fully open mortgages are offered by the government agencies, but in some cases even the private lenders do proffer fully open mortgages with some limitations.
To a certain extent, the open mortgage with a fixed penalty or notice is comparable to the 'no notice or penalty' credit product. Both the open mortgage variations are analogous to the level that the borrower is able to pay the entire principal sum or a part of it beforehand at any given point of time. This makes the variation 'open', but it cannot be termed as 'fully open' since the mortgage document clearly states that a pre-set fine or penalty needs to be paid while paying the mortgage amount in advance. It may be mentioned here that some times the section in the mortgage deed also mentions about issuing some notice or reminder to the lender to compensate for the monetary penalty. It is, however, not necessary to bargain the fine amount while making the advance payment against the mortgage. Normally, the sum to be paid as penalty is decided at the time of reserving the mortgage. Normally, the amount paid as penalty or fine is equivalent to three months' interest payment on the principal amount. Nevertheless, the fine may perhaps be less or more than three months' interest and be a special arrangement or preset amount agreed by the lender and the borrower. It is also important to bear in mind that even the price to sever the mortgage is also pre-set - agreed upon by the lender and the borrower when the mortgage is booked or reserved. It is important to note that this amount is not based on the lender or investor's prudence at the time of making the advance payment against the mortgage.
A limited or partly open mortgage with no monetary fine or reminder or notice on a particular fraction of the principal amount is open merely to a certain limit. In fact, by virtue of an unwarranted clause or article in the mortgage deed, the mortgagers or borrowers are permitted to pay in advance a sum equivalent to 10 per cent or 15 per cent without having to pay any fine or serve a notification on the sum paid beforehand. However, it may be borne in mind that the section is applicable only to a fraction of the mortgage that is shelled out ahead of time. Putting it differently, for the simple reason that a mortgage possesses restricted prepayment privileges, it cannot be termed as an open mortgage. In this case only 10 or 15 per cent of the mortgage is open per annum, while the deed makes no mention on the remaining part of the mortgage, which is actually considered to be closed. Hence, the prepayment on the remaining part of the mortgage can only be made when it is due.
Incidentally, while the borrower is allowed to pay a fraction of the mortgage in advance without having to pay and fine on that amount, it is essential to pay a penalty while the closed fraction of the mortgage is prepaid on maturity. Unlike in the instance of an open mortgage with a fixed penalty or notice, in the instance of a limited or partly open mortgage with no monetary fine or notice, the amount of penalty is not preset. On the contrary, the fine amount is negotiated at the time of making the prepayment for the closed portion of the mortgage. As the creditors don't receive an before time reimbursement of the closed part of the mortgage, it is entirely up to their prudence to settle on if the amount needs to be paid beforehand or bargained again before the mortgage is due for repayment. It is also up to the lender to decide the amount of penalty the mortgagor is required to shell out to sever the mortgage contract. It is important to note that while the mortgage deed does not require the borrower to pay any fine of the open portion of the mortgage - that is 10 to 15 per cent of the credit, the penalty on the remaining closed part of the mortgage, which comprises 85 to 90 per cent of the mortgage, can be as exorbitant or as awkward as the creditor may want. This is something similar to any other closed mortgages where also the penalty is not only too high, but also quite unreasonable.
This type of mortgage is a fusion of two groupings of mortgages - the 'open mortgage with a fixed penalty or notice' and the "limited (partially) open mortgage with no penalty or notice on that portion'. Like in the limited or partly open mortgage with no monetary fine or notice on a particular fraction, the limited (partially) open mortgage with fixed penalty or notice on that portion also offers the borrower the benefit of a restricted (approximately 10 to 15 per cent of the total mortgage value) open beforehand payment. And in this case too, the remaining part (85 to 90 per cent) of the mortgage is deemed to be closed. Again, like in the instance of the open mortgage with a fixed penalty or notice, in this case too, the borrower has to pay a preset fine or in lieu of it requires serving a notice for a fixed amount in order to be able to make use of the benefit of restricted beforehand payment. In this category of mortgage too, the lender is free to ask for any amount of fine it wants to when the borrower prepays the closed amount of the mortgage. If the borrower fails to oblige, the lender enjoys the complete prudence of declining permission to make the beforehand payment on the whole.
It is important to note here that irrespective of which category they belong to, all mortgages are deemed fully open when they are due for payment or on maturity. When the mortgage matures, the borrower is entitled to repay the entire outstanding principal amount or a part of it. In this case, the borrower is not required to pay any penalty on prepayment.
