The definition of an open-end mortgage underlines the fact that the mortgage or trust deed can be increased by the mortgagee (borrower). The mortgagee may secure additional money from the mortgagor (lender) through an agreement, which typically stipulates a maximum amount that can be borrowed. That might be a bit too complicated, so we’ll try to dissect the open-end mortgage in more understandable terms.
The open-end mortgage is a type of mortgage that is more flexible for the mortgagee and more giving, unlike a closed-end mortgage. Yes, giving! A mortgagee, through an open-end mortgage, can obtain a specific amount of money that is called a principal amount. The first time the mortgagee takes out money, they take out 50% as they are not required to utilize it all. For that 50% (which is called an outstanding amount) they will have to pay interest, but as the other 50% is unused, the interest will not be required for it. With that money, the mortgagee buys the house. After a while, with plans to renovate the house, they take out 25% more. Now, they will pay interest for 75% of the mortgage, which is called a total outstanding balance.
For example; when a borrower takes out a mortgage, uses a part of it for the purchase of the home and leaves the rest there for future use. The borrower only pays interest rates for the amount of money used. This is how an open-end mortgage is compared to an open-end loan. The difference between the two is that for an open-end mortgage, the funds are available for a specific amount of time, while open-end loans are revolving credits that can be reused until the borrower decides to close the line of credit.
The mortgage is used to purchase property, but through an open-end mortgage, the borrower can use it on renovations for that property. This is a drawback of the open-end mortgage. It can only be used for the collateral that is pledged for the mortgage.
Jonathan wants to buy a house for him and his family. He manages to obtain a $200,000 principal amount from an open-end mortgage that he intends to use to purchase a home. The mortgage has a fixed term of 30 years and a fixed interest rate of 6.25%, which suits him because he intends to stay there until his kids are all grown-up. To buy the home, he needs $100,000, so Jonathan takes out half of the principal amount. On this $100,000 outstanding amount, Jonathan begins to pay interest rates at 6.25%. Seven years pass, and Jonathan keeps paying his interest rates, but he wants to renovate the kitchen, so he goes back to the lender and takes out an additional $50,000 from the mortgage that will be added to the outstanding amount which would total at $150,000. On the total outstanding balance, Jonathan will make interest payments at the same interest rate of 6.25%.