Open vs Closed Mortgage in Canada — Which is Right for You?

The Key Difference at a Glance

The terms "open" and "closed" refer specifically to whether you can repay your mortgage early — not to the interest rate type, amortization length, or any other feature. Here's how they compare on the dimensions that matter most:

Almost 95% of Canadians choose closed mortgages — and for good reason. The rate premium on an open mortgage is substantial, and the flexibility it provides is rarely needed by the typical homebuyer who is settling in for a 5-year term. Where open mortgages earn their premium is in very specific short-term scenarios we'll walk through later in this guide.

Closed Mortgages — How They Work

A closed mortgage is the most common mortgage product in Canada. When you choose a closed mortgage, you agree to specific terms: you'll repay according to your regular payment schedule, and while you can make some additional payments (within your prepayment privilege), you cannot fully repay the mortgage or break out of it without paying a financial penalty.

In exchange for accepting these restrictions, your lender offers you a meaningfully lower interest rate — typically 1 to 2 percentage points lower than the equivalent open mortgage. Over the life of a $500,000 mortgage, that rate difference is worth tens of thousands of dollars in interest savings.

Most closed mortgages in Canada run for a term of 1, 2, 3, or 5 years — with the 5-year fixed closed mortgage being by far the most popular. During that term, your rate is set (if fixed) or moves with prime (if variable), and your repayment schedule is clear.

Prepayment Privileges on Closed Mortgages

Closed doesn't mean zero flexibility. Most Canadian closed mortgages come with prepayment privileges — rules that let you make additional payments above your regular schedule without triggering a penalty. The standard privilege from major banks is typically:

Better lenders — particularly monoline lenders like First National and MCAP — often offer 20/20 privileges: 20% lump sum per year plus 20% payment increase. This is significantly more flexible. On a $400,000 original mortgage, a 20% annual privilege allows up to $80,000 in lump sum payments per year — enough to meaningfully accelerate paydown without an open mortgage.

Penalties for Breaking a Closed Mortgage

If you need to break a closed mortgage — to sell your home, access equity, divorce, or take advantage of significantly lower rates — you'll pay a prepayment penalty. For fixed rate mortgages, this is the greater of: three months' interest, or the Interest Rate Differential (IRD). For variable rate mortgages, it's almost always just three months' interest — a much simpler and typically smaller number.

Open Mortgages — How They Work

An open mortgage gives you the right to repay any amount at any time — including the full outstanding balance — with absolutely no prepayment penalty. There is no limit to how much you can prepay or how often. You can walk into your lender tomorrow and write a cheque for the full balance, and they cannot charge you a cent for the privilege.

This flexibility carries a significant price: open mortgage rates are typically 1 to 2 percentage points higher than equivalent closed mortgage rates. In early 2026, while 5-year closed fixed rates from brokers are available around 4.89%, open mortgage rates typically run 6.5-7.0% — a spread of roughly 1.5 to 2.1 percentage points.

Open mortgages also come in much shorter terms than closed mortgages. The most common open mortgage terms are 6 months and 1 year. It's rare to find a true open mortgage beyond a 1-year term, which further limits their appeal for long-term borrowers.

Who Typically Uses Open Mortgages

Open mortgages serve a specific set of situations where the premium is genuinely worth paying:

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  Bridge financing: When you've bought a new property before selling your existing one, and need short-term financing that can be repaid the moment your sale closes — with no penalty for early repayment.
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  Selling within 6-12 months: If you know with reasonable certainty that you'll be selling your home within the next year and don't want to port your mortgage or pay a break penalty.
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  Large imminent windfall: Expecting a significant inheritance, insurance settlement, business sale proceeds, or large bonus within the mortgage term that you plan to use for full or near-full repayment.
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  Extreme uncertainty: Facing a major life transition — divorce, estate settlement, relocation — where your financial situation is too uncertain to commit to a closed term with penalty exposure.

The rate premium on an open mortgage on a $500,000 balance at 1.5% above the closed rate equals $7,500 per year in additional interest — or about $625 per month. That's a substantial ongoing cost, and it must be weighed against the penalty you're avoiding.

Prepayment Privileges on Closed Mortgages — A Powerful Tool

Most Canadians dramatically under-use their prepayment privileges. These provisions allow you to accelerate your mortgage paydown significantly — without an open mortgage — if you use them strategically.

The annual lump sum privilege is typically calculated as a percentage of your original principal — not your current outstanding balance. If you borrowed $400,000 originally and now owe $350,000, a 10% annual privilege still lets you put down $40,000 per year (10% of $400,000). At 20%, you can put down $80,000 per year.

A critical detail many borrowers miss: the annual prepayment clock resets on a specific date, not your mortgage anniversary. Many lenders reset on January 1st of each calendar year. This means if you have money to put down, making a lump sum payment on December 31st and another on January 1st effectively doubles your allowance in a very short window — a strategy worth knowing.

Worked Example: The Power of Prepayment

The extra $125,000 in payments doesn't just reduce your balance by $125,000 — it saves roughly $87,000 in interest because you eliminate all the future interest that would have been charged on that principal. And it shortens your amortization by roughly 4 years, meaning 4 years fewer of mortgage payments entirely.

This example illustrates why many financial advisors argue that a closed mortgage with strong prepayment privileges gives most Canadians everything they need. The open mortgage rate premium is rarely justified when you can achieve significant early paydown through your prepayment privileges at zero extra cost.

Mortgage Penalties — The Real Cost of Breaking a Closed Mortgage

Understanding mortgage penalties is essential before deciding between open and closed — because the penalty is the entire reason open mortgages exist. The situations where open mortgages make financial sense are precisely the situations where a closed mortgage penalty would be painful.

Why People Break Mortgages

Life doesn't always align with a 5-year mortgage term. Common reasons Canadians break their mortgages mid-term include: selling the home to move for work or personal reasons, divorcing and needing to remove one borrower, refinancing to access equity for renovations or investment, and taking advantage of dramatically lower rates when market rates fall significantly below your contract rate.

Fixed Rate Penalty: IRD vs 3 Months Interest

For fixed rate closed mortgages, the penalty is the greater of: three months' interest on your outstanding balance, or the Interest Rate Differential (IRD).

The IRD is calculated roughly as: (your contract rate − the lender's current comparison rate for your remaining term) × outstanding balance × remaining months ÷ 12. The comparison rate is where things get complicated — and expensive.

Big 6 banks use their posted rates as the comparison rate when calculating IRD. Posted rates are artificially high (they are used as a negotiating anchor, not actual product rates). This inflated comparison rate produces a smaller IRD, which actually seems counter-intuitive — but the real damage is done when your original rate was already deeply discounted from posted. The net effect is that bank penalties are often $15,000–$40,000 on a $500,000 mortgage with 2–3 years remaining.

Monoline lenders, by contrast, use their actual discounted rates as the comparison rate. Their IRD calculations produce much smaller penalties — typically $3,000–$12,000 for the same mortgage scenario.

Variable Rate Penalty: Simple and Small

Variable rate closed mortgages have a significant penalty advantage: the penalty is almost always just three months' interest, with no IRD component. On a $500,000 mortgage at a variable rate of 4.15%, three months' interest equals approximately $5,188. While this isn't trivial, it's dramatically less than the $15,000–$40,000 that fixed rate mortgages can carry.

This penalty asymmetry is a significant reason why many mortgage professionals recommend variable rate mortgages to clients who value flexibility or who have meaningful life uncertainty — even if a fixed rate is slightly lower. The smaller, more predictable penalty on a variable closed mortgage may provide nearly as much practical flexibility as a true open mortgage, at a fraction of the rate premium.

When to Choose an Open Mortgage

Given the significant rate premium, open mortgages make sense only in specific, well-defined circumstances. Here are the situations where the premium is genuinely justified:

When NOT to Choose an Open Mortgage

• ✗You are planning to stay in your home for more than 12 months
• ✗Your closed mortgage comes with 20% prepayment privileges (First National, MCAP, many credit unions)
• ✗You have a variable rate closed mortgage — the 3-month interest penalty is already small and predictable
• ✗The monthly rate premium would strain your budget
• ✗You have access to a convertible mortgage at a lower premium than a full open product

The Rate Trade-Off — Is the Open Premium Worth It?

Let's put real numbers to the open vs closed decision. As of early 2026, here is where rates stand:

The spread between a best closed rate and a typical open rate is approximately 1.5 to 2.1 percentage points. On a $500,000 mortgage outstanding balance, that premium costs:

The Break-Even Scenario

For an open mortgage to be financially justified, your penalty savings must exceed your rate premium costs. Let's walk through a realistic scenario:

In most scenarios, the math of an open mortgage is marginal at best. The economics only work clearly when the alternative penalty would have been very large (a big-bank IRD on a fixed rate mortgage), your payoff is very certain, and the open term is short enough that the rate premium doesn't compound against you.

The most practical takeaway: rather than defaulting to an open mortgage for "peace of mind," most Canadians should instead negotiate the best possible prepayment privileges on a closed mortgage, choose a variable rate closed mortgage (with its smaller, simpler penalty), or work with a mortgage broker to choose a monoline lender whose IRD calculation is transparent and fair.

Frequently Asked Questions