You have options when it comes to mortgages, and that includes whether to opt for an open or closed mortgage. Each one is designed with a specific borrower in mind, which is why you’ll need to determine what your particular needs are before choosing one over the other.
Let’s take a look at each mortgage type in detail to help you decide which one might suit you best.
Key Points
- Open mortgages offer flexibility in terms of early loan repayment and making lump sum payments towards the principal, but they tend to come with higher interest rates.
- Closed mortgages have limits on how much extra you can repay. Moreover, they come with penalty fees for going over the repayment limits and for repaying the mortgage early, though interest rates tend to be lower.
- Deciding between an open or closed mortgage depends on your financial situation, how much flexibility you want, and your long-term goals.
Snapshot: Open Vs Closed Mortgages
The following chart provides a quick comparison of open vs closed mortgages:
| Open Mortgages | Closed Mortgages | |
| Prepayment Flexibility | Allows prepayments without penalty | Prepayments are generally allowed up to certain limits. Penalties apply for exceeding these limits. |
| Early Repayment | You can pay off the full balance at any time with no penalties | Paying off the full balance early typically comes with penalties |
| Interest Rates | Generally higher than closed mortgages | Generally lower than open mortgages |
| Loan Term | Typically shorter than closed mortgages | Typically longer than open mortgages |
| Best For | -Homebuyers who want the flexibility to be able to make lump -sum payments towards the principal when they want, or pay off the mortgage early -Homebuyers who have sold their home or are looking to sell their home soon and want to avoid a penalty | -Homebuyers who plan to stay in their home for a long time, want longer terms and predictable payments, and lower rates |
What Is A Closed Mortgage?
A closed mortgage is a type of mortgage that comes with specific terms regarding prepayments and early repayment. You’re only allowed to make extra payments up to a certain limit per year without incurring penalties. If you pay off the mortgage early or go over the prepayment limit, you could face penalties.
In exchange for this relative inflexibility, closed mortgages tend to come with lower interest rates compared to open mortgages. These mortgages also typically come with longer terms.
What Is An Open Mortgage?
An open mortgage is a type of mortgage that has more flexibility in its repayment terms compared to closed mortgages. You’re free to make extra payments towards your principal or repay the entire balance at any time without penalties.
In exchange for this flexibility comes higher rates compared to closed mortgages. Plus, open mortgages usually have shorter terms.
Find The Best Mortgage For Your Needs
| Amount | Rate | Availability | Products | |
 Loans Canada | Varies | Varies | All of Canada | - First mortgage - Refinancing - Renewal - Lender switch - Home equity loans |
 Alpine Credits | $10,000+ | Based on equity | All of Canada except Quebec | - Home equity loans |
 Mortgage Maestro | $10,000+ | 5.19%+ | All of Canada except Quebec | - First mortgage - Refinancing - Renewal - Line of credit (HELOC) - Reverse mortgage |
 Neo Mortage™ | Varies | 5.54%+ | All of Canada except Quebec | - First mortgage - Refinancing - Renewal |
 nesto | $100,000+ | 5.34%+ | All of Canada | - First mortgage - Refinancing - Renewal |
 Homewise | Varies | Varies | BC, AB, MB ON | - First mortgage - Refinancing - Renewal - Lender switch |
Mortgage Prepayments: Open Mortgages Vs. Closed Mortgages
The biggest difference between open and closed mortgages is the level of flexibility between the two. While an open mortgage can be repaid without penalty at any time, closed mortgages have limits and penalties regarding prepayments.
With closed mortgages, you can generally prepay up to a certain limit each year, however, the exact terms will vary by lender. If you exceed the limit or pay off a mortgage before your term, you’ll be slapped with a penalty fee for doing so.
The exact amount you’ll have to pay to cover prepayment penalties on closed mortgages depends on whether your mortgage rate is fixed or variable.
Variable Rate Mortgage
On a variable-rate mortgage, the prepayment penalty fee is typically 3 months of interest. This is calculated by multiplying your current mortgage rate by your remaining mortgage balance and then multiplying by 3/12 (or 0.25).
Fixed-Rate Mortgage
On a fixed-rate mortgage, you’ll be charged 3 months of interest or the Interest Rate Differential (IRD) penalty, whichever is greater.
Interest Rate Differential (IRD)
The IRD penalty takes into account the interest your lender would be losing due to you breaking your mortgage contract early. It’s calculated by taking the difference between the amount of interest you’d be paying on your current term vs the next term.
However, every lender may have their own way of calculating the IRD. It’s also important to note that the big banks have the worst IRDs due to their inflated posted rates. So, it’s important that you check your mortgage contract or speak with your lender to find out what this cost will be for you if you break your mortgage early.
Learn more: Breaking A Canadian Mortgage Contract
Interest Rates: Open Mortgages Vs. Closed Mortgages
As mentioned, you’ll be more likely to have a higher interest rate with an open mortgage than with a closed mortgage. But the exact rate you’re charged will also depend on whether you opted for a variable- or fixed-rate mortgage.
Interest Rates On Variable-Rate Mortgages
The rate on a variable-rate mortgage, whether open or closed, fluctuates at various points throughout the mortgage term based on market conditions. This is because variable rates are based on the prime rate.
- Closed Variable Mortgages – These mortgages come with lower interest rates than an open mortgage.
- Open Variable Mortgages – Variable rates on open mortgages are typically higher due to their flexibility.
Interest Rates On Fixed-Rate Mortgages
The rate on a fixed-rate mortgage remains the same throughout the mortgage term, regardless of what’s happening in the market.
- Closed Fixed-Rate Mortgage – The appeal of a closed fixed-rate mortgage is that the rate is usually lower than it is for an open mortgage. But once you’re locked in, you’re stuck with that rate for the duration of the mortgage term. This can be a good thing if rates are expected to increase in the near future, but if they happen to dip, you won’t be able to break your mortgage to take advantage of those lower rates unless you pay the prepayment penalty fee.
- Open Fixed-Rate Mortgage – With an open fixed-rate mortgage, the interest rate will be higher because you’ll have the benefit of locking in a rate while having the flexibility to repay your mortgage at any time without repercussions. Fixed-rate open mortgages are meant to be short-term mortgages, with terms that usually last no more than one year.
Pros And Cons Of Closed Mortgages
There are perks and drawbacks of closed mortgages that you should consider before opting for this loan type.
Pros
The following are the benefits of closed mortgages:
- Lower Interest Rates. Closed mortgages generally offer lower rates than open mortgages, which can save you money over the long run. This is particularly true if you’re not planning to repay your mortgage early.
- Predictable Payments. Fixed monthly payments offer financial stability and make budgeting easier.
- Longer Terms. Closed mortgages are typically available for longer terms, which provide more consistency in financial management.
Cons
Here are some drawbacks of close mortgages to consider:
- Limited Prepayment Options. Closed mortgages have restrictions on making extra payments and paying the loan off early. You can only make a certain number of lump-sum payments per year without being charged a penalty.
- Penalty Fees. You won’t be able to pay off the mortgage early without incurring penalties.
- Longer Commitment. Since loan terms tend to be longer, you’ll be committed to your loan contract for a longer period of time compared to open mortgages. This may be an issue if you want to make changes before the loan term is up.
Pros And Cons Of Open Mortgages
Consider the advantages and disadvantages of an open mortgage before choosing this option.
Pros
Open mortgages come with a few key perks, including the following:
- Flexibility In Making Extra Payments. You can make extra lump-sum payments without restrictions or penalty fees.
- Full Prepayment Flexibility. You can pay off the entire mortgage balance at any time without incurring penalties.
- Less Commitment. With a shorter term, you’ll have more flexibility if you plan to refinance or sell your home in the near future.
Cons
There are also a couple of downsides of open mortgages, such as the following:
- Higher Interest Rates. Open mortgages typically come with higher interest rates in exchange for the added flexibility.
- More Frequent Planning. The shorter terms require more frequent reviewing or refinancing.
What Are Convertible Mortgages?
Borrowers who might be uncomfortable choosing between open and closed mortgages may have the opportunity to take out a “convertible” mortgage, which are fixed-rate closed mortgages with a very short term.
With a convertible mortgage, you have the option to make larger prepayments when your mortgage is up for renewal without having to pay any penalties, since the term renewal will be a lot sooner than a typical mortgage term. That said, with any mortgage that’s open or closed, you can pay off the mortgage in full at renewal without penalty.
You’re free to convert your short-term convertible mortgage — usually about 6 months — into a longer-term mortgage with no penalties. That said, there could be a fee to convert your mortgage into a longer-term one.
When Are Convertible Mortgages Suitable?
You might want to consider a convertible mortgage in the following cases:
- You intend to sell your home within the next few months
- You come across a large sum of money to be able to put towards your mortgage and pay it off early
- Interest rates are expected to decline within the next few months
Open Vs Closed Mortgages: Which One Is Right For You?
Your decision to choose an open or closed mortgage should be based on your current financial situation, as well as where you see yourself in the foreseeable future. While flexibility might not be too important for some borrowers, it might be a must-have for others.
Consider An Open Mortgage If:
- You Want To Sell Your Home Shortly. If you plan to sell your home soon, an open mortgage will ensure that you avoid any early repayment fees that you would have to pay if you broke your closed mortgage early.
- An Inheritance Is Expected. If you know you’ll come across a large sum of money, you could put it towards your mortgage principal, which would be possible with an open mortgage.
- Your Income Is Expected To Increase. If you anticipate a significant raise at work, you might be able to put more towards each mortgage payment.
Consider A Closed Mortgage If:
- You Plan On Settling Down. If you don’t plan to sell your home within the next few years, you don’t need the flexibility to break your mortgage early. In this case, it would make more sense to take out a closed mortgage to take advantage of a lower interest rate.
- You Prefer No Financial Changes. If you don’t expect your income to change or don’t have any inheritance money coming your way, a closed mortgage might be suitable for you.
Bottom Line
There are clear benefits to both open and closed mortgages, but those perks only apply in certain scenarios. Assess your financial situation and where you foresee yourself in the near future before deciding which type of mortgage to apply for.
Frequently Asked Questions
What’s an IRD?
What mortgage should I get if I expect to sell soon?
What is the Canadian Prime Rate?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
