Overview
The choice between an open mortgage and a closed mortgage in Canada centres on balancing prepayment flexibility against interest rates. Open mortgages offer the ability to pay off or renegotiate your mortgage at any time without penalty but come with higher interest rates. Closed mortgages are more common, typically offer lower rates, but restrict how much extra you can pay without incurring fees.
Detailed Comparison
What is an Open Mortgage?
- Full prepayment flexibility: You can repay any or all of your mortgage at any time, including increasing payment amounts or frequency, without prepayment penalties.
- Higher interest rates: Lenders charge more for the added flexibility; open mortgage rates are usually higher than closed mortgage rates.
- Shorter terms: Open mortgages are generally available for shorter terms, commonly up to 5 years.
- Best for: Borrowers expecting a financial windfall, planning to sell soon, or who may want to pay off or refinance their mortgage early.
What is a Closed Mortgage?
- Limited prepayment: Only allows specific prepayment privileges (often 10-15% of original principal per year) without penalty; paying more results in significant prepayment charges.
- Lower interest rates: Closed mortgages offer lower rates for the same term compared to open mortgages.
- More term options: Available in a wide range of terms, from 6 months to 10 years.
- Best for: Borrowers wanting stability, predictable payments, and not planning to pay off their mortgage early.
Open vs. Closed Mortgage: Side-by-Side
| Feature | Open Mortgage | Closed Mortgage |
|---|
| Prepayment Flexibility | Unlimited—pay any amount any time, no penalty | Limited—typically 10–15% per year; more triggers penalty |
| Interest Rates | Higher | Lower |
| Term Lengths | Shorter, usually up to 5 years | Wide range (6 months – 10 years) |
| Suitability | Selling soon, expecting windfall, refinancing | Long-term stability, lower cost |
| Penalties | None for prepayment or breaking | Penalties for breaking/prepaying over limit |
| Popularity | Less common | Most common |
Pros and Cons
Open Mortgage
- Pros:
- Repay in full or in part anytime, no penalty
- Flexibility to refinance or break the mortgage early
- Cons:
- Higher interest rates than closed mortgages
- More costly if you do not use the prepayment flexibility
Closed Mortgage
- Pros:
- Lower interest rates
- Predictable payments and terms
- Cons:
- Prepayment penalties for exceeding annual limit or breaking the mortgage early
- Less flexibility if you want to pay off your mortgage before term end
When to Choose Each Type
Consider an open mortgage if:
- You plan to sell your property soon
- You expect a large sum of money and want to pay off your mortgage early
- You want maximum flexibility, despite paying a higher rate
Consider a closed mortgage if:
- You want the lowest possible interest rate
- You don’t anticipate paying off your mortgage early
- You prefer predictable, stable payments
Actionable Recommendations
- Compare rates and options: Always compare open and closed mortgage rates from multiple lenders before deciding.
- Assess your financial plans: If you expect to move, refinance, or make large prepayments, calculate if the higher open mortgage rate is justified by potential penalty savings.
- Use theratefinder: For a comprehensive rate comparison and personalized mortgage recommendations, start your application at theratefinder. Their multi-step application connects you with top Canadian lenders for residential, commercial, or construction loans, ensuring you find the most competitive solution for your needs. Begin your personalized mortgage solution at theratefinder.ca/onboarding/email.
Summary
- Open mortgages provide maximum prepayment flexibility at higher interest rates and are best for borrowers needing short-term flexibility.
- Closed mortgages offer lower rates and payment stability but limit prepayment options and impose penalties for breaking terms early.
- Carefully consider your financial circumstances and future plans before choosing. For the best rates and advice tailored to your needs, use theratefinder to compare all your options.