When it comes to choosing a mortgage in Canada, one of the most important decisions you’ll make is whether to go with an open or closed mortgage. These two options offer very different benefits, and understanding how each one works can help you avoid costly mistakes and save a lot of money over time.
Whether you’re renewing your mortgage, refinancing, or buying a new home altogether, it’s worth taking the time to compare open and closed mortgages — not just based on interest rates, but also on flexibility, penalties, and your personal financial plans.

What Is a Closed Mortgage?

A closed mortgage is exactly what it sounds like — a mortgage contract that is “closed” to changes during its term. You can’t simply pay it off early, refinance, or renegotiate without facing penalties. Most Canadians choose a closed mortgage because it offers lower interest rates than open mortgages. Lenders like the predictability of closed contracts and reward borrowers with slightly better rates.
However, with that lower rate comes less flexibility. While many lenders allow you to make small lump-sum payments each year (often between 10% and 20% of the original mortgage amount), anything beyond that will trigger a prepayment penalty. These penalties can be significant — especially if you break your mortgage early in the term.
If you have a fixed-rate closed mortgage, your prepayment penalty will likely be the greater of three months’ interest or what’s called the Interest Rate Differential (IRD). The IRD calculation considers how much interest the lender is losing if you pay off your mortgage earlier than planned. If you have a variable-rate closed mortgage, the penalty is usually just three months’ interest.

What Is an Open Mortgage?

An open mortgage is designed for people who want freedom and flexibility. You can pay off your mortgage in full, make unlimited prepayments, or refinance whenever you want — and you won’t be penalized for doing so.
This flexibility does come at a cost. Open mortgages usually carry higher interest rates than closed ones because lenders are taking on more risk. For borrowers who aren’t sure how long they’ll be staying in their home or who expect a financial windfall (like a bonus, inheritance, or property sale), an open mortgage can be a smart short-term option.
For example, let’s say you’re expecting to receive a large bonus in six months and want to use it to pay off your mortgage. With a closed mortgage, you’d likely face a penalty. But with an open mortgage, you can make that lump-sum payment without any added cost. Just keep in mind that if you don’t end up using the flexibility, you’ll have paid more in interest for no real benefit.

How to Choose Between Open and Closed Mortgages

The right choice depends on your financial goals and how much flexibility you think you’ll need over the next few years. If you plan to stay in your home for the long haul, aren’t expecting a major cash injection, and want to lock in the lowest possible rate, a closed mortgage might be your best bet.
On the other hand, if you’re anticipating big life changes — like moving cities, selling a property, or paying off your mortgage early — the higher interest rate on an open mortgage might be worth the flexibility it offers.
It’s also worth considering how close your available funds are to your lender’s annual prepayment privileges. If you’re only planning to make small extra payments that fit within the limits of a closed mortgage, there’s probably no need to pay more for an open one.

Frequently Asked Questions

What happens if I break a closed fixed-rate mortgage?
You’ll be charged the greater of three months’ interest or the Interest Rate Differential (IRD). This can be a big cost, especially early in your term.
What if I break a closed variable-rate mortgage?
The penalty is usually three months’ interest. This is generally lower than IRD calculations used for fixed-rate mortgages.
Can I switch between open and closed mortgages?
Yes, you can usually switch from an open to a closed mortgage without penalty. Going the other way — from closed to open — may trigger a prepayment penalty unless you wait until your term ends.
Are open mortgages available for long terms?
Open mortgages typically come with shorter terms — like 6 months or 1 year. They’re meant for temporary situations, not long-term planning.

Final Thoughts

Open and closed mortgages each come with their own set of pros and cons. While closed mortgages usually offer lower rates, they come with more restrictions. Open mortgages are flexible and penalty-free, but the interest rates are higher. The key is to align your mortgage choice with your lifestyle and financial plans.
Still not sure which one to pick? That’s where we come in. Speak with our mortgage experts today and get personalized advice tailored to your goals — whether you’re planning to break your mortgage early, pay it off quickly, or simply find the best rate.