When shopping for a Canadian mortgage, one of the fundamental choices you will encounter is between an open mortgage and a closed mortgage. These terms describe how freely you can repay or exit your mortgage during the term — and the difference has significant implications for both rate and flexibility. Understanding when each makes sense can save you thousands of dollars.
A closed mortgage restricts how much you can repay before your term ends. Paying more than your allowed prepayment privileges triggers a prepayment penalty. The vast majority of Canadian mortgages — perhaps 95% — are closed. The trade-off for accepting these restrictions is a lower interest rate compared to open mortgages.
Closed does not mean completely inflexible. Almost all closed mortgages in Canada include prepayment privileges that allow some extra repayment without penalty — typically 10–20% of the original balance per year and the ability to increase your regular payment. "Closed" means you cannot pay off the entire remaining balance freely at any time without penalty.
An open mortgage can be paid off in full or in any amount at any time without penalty. You have complete freedom to repay, refinance, or break the mortgage whenever you choose. For this flexibility, you pay a significantly higher interest rate — typically 1–2% more than a comparable closed mortgage.
The rate differential between open and closed mortgages is substantial:
The premium for an open mortgage is the price of optionality. You pay more in interest for the freedom to exit penalty-free. Whether that premium is worth paying depends entirely on your likelihood of needing to exit.
The penalty for breaking a closed mortgage before term end is the greater of:
The IRD can be very large for fixed rate mortgages when current rates have fallen since you locked in. Banks calculate IRD differently than monoline lenders — bank IRD calculations often use posted rates (which are inflated above actual rates) in a way that produces much larger penalties. Monoline lenders typically use discount rates in their IRD calculation, resulting in lower penalties.
Despite the "closed" label, most Canadian closed mortgages allow meaningful extra repayment:
Using prepayment privileges aggressively significantly accelerates your equity build-up and reduces total interest — all without triggering any penalty.
Despite the higher rate, an open mortgage makes financial sense in specific situations:
If you know you will sell within 6–12 months, an open mortgage eliminates the prepayment penalty entirely. The rate premium over a few months is far less than an IRD penalty.
If you are receiving an inheritance, selling a business, or otherwise expecting large proceeds within the next 6–12 months, an open mortgage lets you pay everything off without penalty.
Recently divorced, between properties, or in an uncertain life situation — an open mortgage may be appropriate as a temporary solution while you figure out your long-term path.
Some open mortgages are available for terms as short as 6 months. This is useful as a bridge: you need financing now but plan to lock in or restructure soon.
Closed mortgages make sense — and are the right choice — in the vast majority of cases:
Even if circumstances change and you need to break a closed mortgage, the penalty may still be less costly than the accumulated rate premium you would have paid on an open mortgage over the same period.
Consider a $500,000 mortgage:
The closed mortgage breaks even with the open mortgage when the penalty for breaking the closed equals the accumulated rate premium. On a fixed-rate closed mortgage with an IRD of $15,000, you would break even after approximately 24 months of open mortgage payments. If you do not break the mortgage within that period, the closed mortgage was financially better.
Some lenders offer hybrid products with more flexibility than standard closed mortgages but lower rates than fully open. These might allow penalty-free repayment up to a higher threshold (25–30% of the original balance per year) or have reduced penalties (2 months' interest instead of IRD). These can represent good middle-ground options for borrowers who want some flexibility but primarily expect to stay the full term.
Before choosing open vs closed, honestly assess: Is there a realistic scenario within your term where I would need to sell or fully repay this mortgage? If the probability is high, lean toward open or choose the shortest closed term available. If the probability is low, take the closed mortgage and save the rate premium.
Most Canadians choose a 5-year closed fixed mortgage and never look back. But those facing life transitions — relocations, divorce proceedings, estate planning, business sales — often benefit from shorter closed terms or open mortgages despite the cost.
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