Open vs. Closed Mortgages: What’s the Difference?

When choosing a mortgage in Canada, one of the most important decisions is whether to select an open or closed mortgage. Both options serve very different purposes—and choosing the wrong one could cost you thousands in interest or penalties.

This guide breaks down the differences so you can choose the best mortgage for your financial plans.

🟦 What Is a Closed Mortgage?

A closed mortgage is the most common type of mortgage in Canada. It offers lower interest rates in exchange for limited prepayment flexibility.

✔ Benefits of Closed Mortgages

• Lower interest rates

• Predictable payments

• Best for long-term stability

• Most lenders offer competitive terms

✘ Drawbacks

• High penalties for breaking your mortgage early

• Limited prepayment options

• Less flexibility if your plans change

⭐ Best For:

Homeowners looking for stability, lower rates, and who don’t expect to break or refinance before their term ends.

🟩 What Is an Open Mortgage?

An open mortgage allows you to pay off your mortgage at any time without penalties. It offers maximum flexibility but often comes with higher interest rates.

✔ Benefits of Open Mortgages

• Pay down your mortgage anytime, penalty-free

• Refinance or switch lenders at any moment

• Ideal for homeowners planning a sale or large lump-sum payment

✘ Drawbacks

• Higher mortgage rates

• Not ideal for long-term borrowing

• Higher monthly payments due to premium pricing

⭐ Best For:

Borrowers expecting to:

• Sell their home soon

• Pay off a large portion quickly

• Refinance in the near future

• Receive a large bonus, inheritance, or payout

🔍 Key Differences: Open vs. Closed Mortgages

FeatureOpen MortgageClosed MortgagePrepaymentsUnlimitedLimited (10–20% typically)PenaltiesNoneHigh if breaking earlyInterest RatesHigherLowerFlexibilityVery highModerate to lowIdeal ForShort-term plansLong-term stabilityRefinancingEasy anytimeOften expensive

🧠 When to Choose an Open Mortgage

Choose an open mortgage if you:

• Expect to sell your home soon

• Plan to refinance within 1–2 years

• Want to pay off your mortgage early

• Expect a large lump-sum payment

• Have short-term or uncertain plans

Open mortgages are common for:

• Bridge financing

• Investment properties

• Temporary homeowners

🏡 When to Choose a Closed Mortgage

Choose a closed mortgage if you:

• Want the lowest possible rate

• Prefer stable payments

• Don’t expect major financial changes

• Plan to stay in your home long-term

• Want predictable budgeting

Most Canadians choose closed mortgages because of the interest savings.

⚠️ Penalty Differences Matter

Breaking a closed mortgage early can trigger:

• Interest Rate Differential (IRD) penalties

• Three months' interest penalties

Open mortgages eliminate these costs—but at the expense of a higher interest rate.

If you’re unsure about future plans, an open mortgage might actually save you more.

📈 Market Outlook: 2025 and Beyond

With interest rate fluctuations expected in 2025, borrowers should consider:

• Open mortgages if expecting rate drops or planning to refinance

• Closed mortgages if wanting protection against rising rates

A mortgage broker can model both scenarios to show which option saves you more.

🚀 Final Thoughts: Which Mortgage Is Best for You?

Your choice depends on your timeline and financial strategy:

• Choose closed for lower rates and long-term stability

• Choose open for flexibility and penalty-free payments

Understanding the difference helps you avoid costly mistakes and choose the mortgage structure that fits your life—not someone else’s.