Open vs closed mortgage: Canadian mortgage terms explained
In Canada, mortgages are either open or closed — a distinction that determines how freely you can repay or break the mortgage. Learn what each type costs, when to choose open, and how to calculate the penalty on a closed mortgage.
Most Canadian mortgages are closed. That means the lender expects you to keep the mortgage for the full term, and if you break it early — to sell, refinance, or pay it off — you pay a prepayment penalty. Open mortgages eliminate that penalty but charge a significantly higher rate in return.
What is a closed mortgage?
A closed mortgage locks in the terms — rate and payment schedule — for the full term (typically 1–5 years in Canada). Most closed mortgages do allow some annual prepayment privileges: typically 10%–20% of the original principal per year, plus a payment increase option. These privileges let you pay down faster without triggering a penalty.
If you break the mortgage outside of these privileges — to sell the home, refinance at a lower rate, or pay it off entirely — you pay a prepayment penalty.
What is an open mortgage?
An open mortgage lets you repay any amount at any time, convert to another product, or break the mortgage — all without a penalty. This maximum flexibility comes at a cost: open-term rates are typically 1%–2% higher than comparable closed-term rates.
Open mortgages are available in short terms (6 months to 1 year). Most borrowers who expect to hold a property for more than 1–2 years choose a closed mortgage and accept the prepayment restrictions.
Side-by-side comparison
| Feature | Open mortgage | Closed mortgage |
|---|---|---|
| Prepayment penalty | None | 3 months interest or IRD |
| Interest rate | Higher (+1–2%) | Lower (market rate) |
| Term options | 6 months, 1 year | 1–10 years (5-year most common) |
| Rate type | Fixed or variable | Fixed or variable |
| Annual prepayment privilege | Unlimited | 10–20% of original principal |
| Best for | Selling soon, large lump sum expected | Holding for full term, rate certainty |
The Interest Rate Differential (IRD) penalty
The IRD is the most expensive prepayment penalty and applies only to fixed-rate closed mortgages. It compensates the lender for the difference between what they earn on your loan versus what they could earn reinvesting at today's rates.
IRD formula (simplified)
IRD = Balance × (Your rate − Posted rate for remaining term) × Remaining term in years
Example: $350,000 balance, 4.5% contract rate, current 2-year posted rate is 3.0%, 2 years
left on term:
IRD = $350,000 × (4.5% − 3.0%) × 2 = $10,500
Note: lenders differ significantly in how they calculate posted rates for IRD purposes. The Financial Consumer Agency of Canada (FCAC) prepayment calculator can estimate your penalty for most major bank products.
Open vs closed: which should you choose?
Choose open if…
- You expect to sell within 1–2 years
- You are receiving a large inheritance or bonus
- You want to refinance as soon as rates drop
- Short-term rates are close to closed-term rates
Choose closed if…
- You plan to stay for the full term
- You want the lowest available rate
- Your prepayment plans fit within the annual privilege
- Rate certainty matters more than flexibility
Variable-rate open vs closed
Variable-rate mortgages in Canada can also be open or closed. A variable-rate open mortgage is rare and very expensive — most variable mortgages are closed. The penalty on a closed variable is typically just 3 months of interest (far less than the IRD on a fixed). This is one reason many borrowers who want flexibility prefer closed variable over closed fixed — the break cost is more predictable.
See the variable vs fixed-rate mortgage guide for a full comparison of rate-type trade-offs in the current market.
Model your Canadian mortgage — including CMHC insurance and stress-test qualifying rate — with the Canadian mortgage calculator. To understand how GDS and TDS ratios limit your borrowing, see the debt service ratio glossary entry.
External references
- FCAC — Mortgage prepayment penalty calculator — Federal consumer agency tool to estimate break costs at major Canadian banks
- OSFI Guideline B-20 — The regulation governing mortgage underwriting at federally regulated lenders
- Bank of Canada — Current interest rates — Policy rate and prime rate data used in variable mortgage pricing
- RateHub — Open vs closed mortgage in Canada — Rate comparison and guidance on which term type fits which situation
- MoneySense — Breaking your mortgage contract — Real-world examples of IRD penalties and how to minimize them
Common questions
What is the difference between an open and closed mortgage?
An open mortgage lets you repay any amount at any time with no penalty. A closed mortgage limits how much extra you can pay each year (typically 10%–20% of the original principal) and charges a prepayment penalty if you break it early. Closed mortgages have lower rates because the lender knows the loan will not be repaid ahead of schedule unexpectedly. The FCAC guide to mortgage types covers open, closed, and convertible terms with plain-language definitions.
How is the prepayment penalty calculated on a closed mortgage?
For variable-rate closed mortgages: the penalty is typically 3 months of interest. For fixed-rate closed mortgages: the penalty is the greater of 3 months of interest or the Interest Rate Differential (IRD). The IRD can be thousands of dollars — it equals the difference between your rate and the current posted rate, multiplied by your balance and remaining term. The FCAC has a prepayment penalty calculator to estimate yours.
When should I choose an open mortgage?
Choose an open mortgage if you expect to sell the property within the term, receive a large lump sum (inheritance, bonus) you plan to put against the mortgage, or need maximum flexibility. The higher rate — typically 1–2% more than a comparable closed term — is the price of that flexibility. If you are just buying a home you plan to hold for 5 years, an open mortgage is rarely worth the premium. RateHub compares open and closed rate premiums in the current Canadian market.
Can I break a closed mortgage early in Canada?
Yes, but you will pay a prepayment penalty. The penalty on a fixed-rate closed mortgage is often the IRD — which on a 5-year term taken at high rates can easily be $15,000–$30,000+. Most lenders publish a prepayment penalty calculator. Always calculate the break cost before deciding to refinance early. Use the FCAC prepayment penalty calculator to estimate your specific penalty before deciding.
What is a convertible mortgage in Canada?
A convertible mortgage is a short-term (typically 6-month) closed mortgage that can be converted to a longer fixed-rate term without penalty. Lenders offer it as a hedge for borrowers uncertain which direction rates will go. The initial rate is usually slightly higher than a comparable 1-year term. MoneySense explains convertible mortgages and when they make more sense than standard 1-year closed terms.
Does the stress test apply to open mortgages too?
Yes. The mortgage stress test under OSFI B-20 applies to all federally regulated mortgage applications — open or closed. You must qualify at the higher of your offered rate +2% or the minimum qualifying rate (5.25%), regardless of the term type.