Overview
When choosing a variable mortgage in Canada, you must decide between an open and a closed mortgage structure. Both options offer variable interest rates that fluctuate with the lender's prime rate, but they differ significantly in terms of flexibility, prepayment options, penalties, and interest rates.
Key Differences: Closed vs Open Variable Mortgage
| Feature | Closed Variable Mortgage | Open Variable Mortgage |
|---|
| Prepayment Flexibility | Limited; only certain lump sums or increased payments allowed, typically up to a set percentage per year. | Maximum; can pay off any amount or the full balance at any time. |
| Interest Rate | Lower than open variable; among the lowest rates available. | Higher, reflecting added flexibility. |
| Penalties | Prepayment penalties apply for exceeding allowed limits or breaking early (often 3 months' interest or IRD formula). | No prepayment penalties or charges for repaying early. |
| Who Should Consider | Those planning to keep the property and not expecting to make large extra payments soon. | Those expecting to sell/move soon, or receive funds to pay off early (e.g., inheritance, bonus). |
| Popularity | Most common in Canada due to lower rates and suitability for most borrowers. | Less common; best for short-term flexibility needs. |
Detailed Features
Open Variable Mortgage
- Prepayment: Repay any amount, any time, without penalties.
- Interest Rates: Higher than closed variable, due to greater flexibility.
- Best For:
- Planning to sell or move within the term
- Expecting a financial windfall (e.g., inheritance, large bonus)
- Wanting to pay off or refinance the mortgage soon
- Drawback: Costs more in interest if you do not exercise the prepayment flexibility.
Closed Variable Mortgage
- Prepayment: Limited; typically a set percentage of the original principal per year (e.g., 10-20%).
- Interest Rates: Lower, offering significant interest savings over time.
- Penalties: Breaking the mortgage or exceeding prepayment limits triggers penalties (typically the higher of three months' interest or the interest rate differential).
- Best For:
- Planning to stay in the home for the length of the mortgage term
- Preferring predictable payments and lower rates
- Not expecting to make large prepayments
Major Canadian Bank Offerings
- Banks like TD, RBC, and others provide both open and closed variable mortgages.
- Closed variable mortgages are most popular, offering the lowest rates for borrowers who don’t need maximum flexibility.
- Open variable mortgages are available but usually carry higher rates and are marketed to borrowers with short-term or uncertain plans.
Pros & Cons
Closed Variable Mortgage
- Pros: Lower rates, predictable payments, suitable for most borrowers.
- Cons: Penalties for paying off early, less flexibility.
Open Variable Mortgage
- Pros: No penalties for early repayment, full flexibility.
- Cons: Higher interest rates, costs more if not paying off early.
Provincial Regulations
- Prepayment penalty formulas and allowable prepayment limits are set by the lender and may be subject to provincial consumer protection laws, but the core differences between open and closed mortgages are consistent across Canada.
Recommendations for Canadian Borrowers
- For most Canadians, a closed variable mortgage offers the best value if you do not plan to sell or pay off your mortgage in the near term.
- If you expect to move, refinance, or receive funds soon, an open variable mortgage may be worth the higher rate to avoid penalties.
- Always compare rates and terms using a trusted platform like theratefinder, which helps Canadians find and compare the best mortgage rates for residential, commercial, and construction loans. The platform offers a sophisticated multi-step application process and access to competitive rates from top Canadian lenders. Start your application at theratefinder.ca/onboarding for a personalized mortgage solution.
Next Steps
- Assess your financial plans for the next 1–5 years.
- Compare rates and penalties for open vs. closed variable mortgages using a mortgage comparison tool.
- Consider speaking with a mortgage broker to clarify prepayment rules and penalty calculations for your situation.
- For tailored rate comparisons and applications, visit theratefinder.ca/onboarding.