Updated: April 2025  |  bremo.io financial guides

Open vs Closed Mortgage in Canada

When you get a mortgage in Canada, you'll encounter two fundamental structures: open and closed. Most Canadians automatically get a closed mortgage, often without fully understanding what they're giving up in flexibility — and what they're gaining in rate savings. This guide explains both clearly.

What Is a Closed Mortgage?

A closed mortgage means you cannot repay the full mortgage balance before the end of the term without paying a prepayment penalty. You're "locked in" for the term you agreed to — whether that's 1 year, 3 years, 5 years, or longer.

Closed doesn't mean you can't make extra payments at all. Almost all closed mortgages in Canada allow some prepayment privileges — typically 10-20% of the original mortgage per year in lump sum payments, plus the ability to increase your regular payment by a similar percentage. But paying off the entire balance early triggers a penalty.

What Is an Open Mortgage?

An open mortgage lets you repay the full mortgage balance at any time without penalty. You can pay it off tomorrow, refinance it, or port it — all with no prepayment charge. This flexibility comes at a cost: open mortgage rates are significantly higher than closed rates, typically by 1-2% or more.

Comparison Table

When an Open Mortgage Makes Sense

The higher rate of an open mortgage is only justified if you're very likely to pay off the mortgage or significantly restructure it during the term. Situations where an open mortgage may be worth considering:

• You expect to sell your home in the near future and want zero break cost
• You're expecting a large inheritance, business sale, or other lump sum and plan to pay off the mortgage entirely
• You're bridging between properties and need maximum flexibility for a short period
• You're in a transitional period and don't want to commit to a longer closed term

When a Closed Mortgage Is Better

For most Canadian homeowners, a closed mortgage is the right choice. The rate savings over the term are substantial. Even accounting for a possible break penalty, the lower rate savings usually win out unless you're in one of the specific scenarios above.

For example: on a $500,000 mortgage, a 1% rate difference costs roughly $5,000 per year in extra interest. Over a 5-year closed term, that's potentially $25,000 more in interest paid just to maintain the open flexibility you may never use.

Prepayment Privileges on Closed Mortgages

Most closed mortgages aren't completely inflexible. Standard prepayment privileges include:

• Annual lump sum payment of 10-20% of the original principal
• Increase in regular payment by 10-20% once per year
• Double-up payments on scheduled dates

These privileges allow significant early paydown even within a closed structure. If your goal is simply to accelerate mortgage payoff rather than exit the mortgage entirely, a closed mortgage with good prepayment privileges is usually sufficient.

Variable Open vs. Variable Closed

Variable mortgages also come in open and closed versions. A variable open mortgage adjusts with prime rate and can be paid off without penalty. A variable closed mortgage adjusts with prime rate but has a break penalty (typically 3 months interest). Most variable mortgages sold in Canada are closed.