Open vs. Closed Mortgage in Canada (2026): What's the Difference?

When you arrange a mortgage in Canada, one of the first choices you'll make is between an "open" and a "closed" mortgage. It sounds technical, but the decision comes down to a single trade-off: an open mortgage buys you total flexibility at a higher interest rate, while a closed mortgage gives you a lower rate in exchange for limits on how much you can prepay. For most borrowers the closed option saves real money — but there are specific situations where paying up for an open mortgage is the smart move. Here's how to tell which camp you're in.

The short answer

A closed mortgage has a lower interest rate but limits how much you can prepay each year and charges a penalty if you break it early — it's the right choice for most people. An open mortgage lets you repay any amount, including the full balance, anytime with no penalty, but carries a noticeably higher rate. Open only makes sense when you genuinely expect to pay off or break the mortgage soon — for example, you're about to sell or a large lump sum is coming. Estimate your payment here.

What is a closed mortgage?

A closed mortgage locks in a rate and term (commonly anywhere from 1 to 5 years), and in return for that lower rate the lender restricts how aggressively you can pay it down. Key features:

• Lower rate — closed terms carry the cheapest rates a lender offers, which is why the overwhelming majority of Canadian mortgages are closed.
• Annual prepayment privileges — you can typically prepay a set percentage of the original balance each year (often 15–20%) and increase your regular payment by a similar percentage, all penalty-free.
• Break penalty — paying the mortgage off in full or refinancing before the term ends triggers a prepayment charge: usually three months' interest on a variable, or the greater of three months' interest and the interest rate differential (IRD) on a fixed.
• Best for — almost anyone who intends to keep the mortgage for the term.

What is an open mortgage?

An open mortgage removes the prepayment restrictions entirely. You can pay any amount — up to and including the entire balance — at any time, with no penalty. That freedom comes at a cost:

• Full flexibility — repay or fully discharge the mortgage whenever you like.
• Higher rate — you pay a premium, often a percentage point or more above a comparable closed rate, for that freedom.
• Best for — short, specific situations: you're about to sell, you're expecting a large lump sum (an inheritance, a bonus, proceeds from another property), bridge or interim financing, or you only need the loan for a few months.

Open vs. closed at a glance

How big is the rate difference — a worked example

The premium on an open mortgage is the whole reason to think carefully. Consider a $500,000 mortgage and two illustrative rates: a closed rate of 5.0% versus an open rate of 6.5% (figures are illustrative, not current quotes).

That roughly $7,500 a year is what you're paying for the right to walk away penalty-free. If you'll hold the mortgage for the full term, you'd pay that premium year after year — far more than a one-time closed-mortgage break penalty would ever cost. But if you'll only hold the loan for, say, three months before a sale closes, the open premium costs you a small fraction of that, while a closed break penalty could be several thousand dollars. That's the crossover that decides it.

Prepayment and penalty differences in detail

The defining difference is what happens when you want to pay down faster than scheduled. On a closed mortgage, your privileges let you chip away meaningfully — on a $500,000 mortgage with a 20% privilege you could prepay up to $100,000 a year without penalty — but anything beyond that, or a full payout, is a break that triggers a charge. On a fixed closed mortgage that charge is usually the interest rate differential, which can run into five figures when rates have fallen since you signed. An open mortgage sidesteps all of this: there's simply no charge, ever. To see what breaking early would actually cost you, run the numbers in the prepayment penalty calculator, and read how the math works in mortgage prepayment penalties and IRD explained.

How to choose

Ask one question: am I likely to pay this off or break it soon? If the answer is no — true for most buyers — a closed mortgage's lower rate saves you money, and your annual prepayment privileges give you plenty of flexibility to pay down faster. If the answer is yes — you're selling shortly, a windfall is on its way, or you only need short-term financing — the open mortgage's no-penalty freedom can easily justify the higher rate. For many "in-between" cases the sweet spot is a closed mortgage with generous prepayment privileges, or a shorter closed term that lines up with when you expect your situation to change.

Don't overpay for flexibility you won't use

The most common mistake is choosing open "just in case." The rate premium is real and usually dwarfs the value of flexibility you never end up using — especially since closed mortgages already allow generous penalty-free prepayments. If your only worry is breaking early to chase a better rate, remember that a closed break penalty is a one-time cost you can model in advance, whereas an open premium is a cost you pay every single month. And keep in mind there is never a penalty at the end of your term: at mortgage renewal you can pay off, switch lenders, or renew freely. Not sure which fits your timeline? Ask Maya or contact our team.

Frequently asked questions

What's the difference between an open and closed mortgage?

An open mortgage can be repaid in full at any time with no penalty but carries a higher interest rate. A closed mortgage has a lower rate but limits how much you can prepay each year and charges a penalty if you break it before the term ends.

Is an open or closed mortgage better?

Closed is better for most people because of the lower rate and because annual prepayment privileges already provide useful flexibility. Open makes sense only if you expect to repay or break the mortgage very soon — for example, before selling.

How much higher is an open mortgage rate?

It varies by lender and term, but open rates are commonly a full percentage point or more above a comparable closed rate. On a $500,000 mortgage that premium can easily run several thousand dollars a year, which is why open only pays off over short holding periods.

Can I make extra payments on a closed mortgage?

Yes. Most closed mortgages allow penalty-free prepayments up to a set percentage (commonly 15–20%) of the original amount each year, plus the ability to increase your regular payment. Only payments beyond those privileges, or a full payout, trigger a penalty.

What penalty applies if I break a closed mortgage early?

Typically three months' interest on a variable-rate mortgage, or the greater of three months' interest and the interest rate differential (IRD) on a fixed-rate mortgage. The IRD can be large when rates have fallen since you signed.

Does a closed mortgage have a penalty at renewal?

No. At the end of your term you can pay it off, switch lenders, or renew with no penalty — penalties only apply when you break the mortgage mid-term.

Not sure which to choose? Talk to us — we'll match an open or closed mortgage to your real timeline so you don't overpay for flexibility you'll never use.