Open vs. Closed Mortgage: A Lower Rate, or More Flexibility?
A closed mortgage has a lower rate but penalties to pay it off early. An open mortgage lets you pay it off anytime with no penalty — at a noticeably higher rate.
What’s the difference between an open and a closed mortgage, and which should I choose?
An open mortgage lets you prepay or pay it off in full at any time with no penalty, but at a noticeably higher rate. A closed mortgage has a lower rate, but paying it off early or breaking it during the term triggers a penalty. Most people choose closed for the lower rate; but if you expect to sell soon or come into a lump sum you want to pay down, the flexibility of an open mortgage can be worth it. It comes down to your plan for this term.
Source: Financial Consumer Agency of Canada (FCAC), canada.ca
When you arrange a mortgage, the lender asks whether you want open or closed. It sounds like jargon, but it’s really a flexibility-versus-rate trade-off. Choose wrong and a penalty can block you when you want to pay off early — or you can overpay on interest for years for flexibility you never use. This article explains the difference, how the penalty is calculated, and when each one makes sense.
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Closed: lower rate, but penalties to prepay
Open: pay off anytime with no penalty, but a higher rate
⚠️The IRD penalty on a fixed closed mortgage can far exceed what you’d expect. Breaking a fixed mortgage in a falling-rate environment can cost several times three months’ interest. Pin down the penalty math before you sign — don’t look only at the rate.
How the penalty is calculated: variable vs. fixed differ
FCAC: federally regulated lenders must disclose clearly
How to choose: start with your plan
A one-line decision: expect to hold long term and want a lower rate → closed (and use your annual prepayment privileges well); expect to sell or pay off in full soon → open. If you want both a low rate and the comfort of prepaying, compare each lender’s prepayment privileges and penalty math closely — those differences often matter more to your real cost than the last decimal of the rate.
Frequently Asked Questions
If open mortgages have higher rates, why do people choose them?
For the flexibility. An open mortgage can be prepaid or paid off in full at any time without penalty, which suits people who expect to sell soon or have a lump sum coming to put against the loan. Paying a little more interest for that flexibility can beat a closed mortgage’s penalty.
Does a closed mortgage mean I can’t prepay at all?
No. Most closed contracts give you some prepayment privileges — for example, paying an extra share of the original principal each year (commonly around 15%–20%, per the contract) with no penalty. Penalties apply only if you exceed the limit or pay it off in full.
How is the penalty calculated if I break a closed mortgage early?
It depends on the rate type: variable is usually three months’ interest; fixed is the greater of three months’ interest and the Interest Rate Differential (IRD). The IRD on a fixed rate can be high in a falling-rate environment, so ask in advance.
How do I find the prepayment terms in my own contract?
Per the FCAC, a federally regulated lender must set out the prepayment privileges, charges, and calculation method in a prominently displayed information box in the agreement. Find that box before signing and read it; if anything is unclear, ask the lender or your mortgage professional.
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