Open End Mortgage

An open-end mortgage is a home loan which the lender allows the borrower to draw additional funds from as and when the property value appreciates over time.

The loan principle is therefore raised.

The credit ceiling however, is usually limited with a stipulated loan-to-value so as to prevent homeowners from over leveraging their finances.

In a way, an open end mortgage would be like having a portion of it as a typical home loan while another portion working like a HELOC.

The regulations surrounding open-end mortgages are almost always centered around preventing borrowers from getting financed for over 100% of the property value.

Because of the way this is structured, sometimes savvy homeowners can abuse the system to drastically increase their gearing.

For example, if a regular homeowner has an open end home loan and takes on a second mortgage, he could already by 100% financed without even drawing any additional funds from the former credit facility. By drawing extra funds, the total loan amount would easily exceed the limits of the property value.

This can leave lenders in a tough position should the loan default and liquidation activities has to commence to get the due amounts back. Because now, there is no way creditors would be able to collect the full amount owing as the property is not worth that much.