Insights & advice
Open vs. closed mortgages
April 2022 – 15 min read
Key takeaways
An open mortgage gives you greater flexibility to repay your mortgage than a closed mortgage
Open mortgages usually have higher interest rates because they offer this flexibility
There are situations where you should consider each type of mortgage
There is a significant cost to breaking a closed mortgage
There is no difference to how you qualify for an open or closed mortgage
What’s the difference between an open mortgage and a closed mortgage?
With an open mortgage, you can increase your payments by any amount, repay in full, refinance or renegotiate any time during the mortgage term without paying a prepayment charge. With a closed mortgage, you are limited in the amount you can increase your payments and you can’t repay in full, refinance or renegotiate without paying a prepayment charge.
Here are some other comparisons:
| Type of mortgage | Open mortgage | Closed mortgage |
|---|---|---|
| How it works | It can be repaid in part/full at any time without prepayment charges. It can be converted to any other term, at any time, without a prepayment charge. If you sell your home, get a substantial salary bonus or commission, inheritance, or another type of financial windfall, you have the flexibility to use that money to pay off your mortgage early and pay less interest. | You’re bound by the terms and conditions of the mortgage for the entire term. You only have flexibility to increase payments and/or make lump sum payments within certain limits according to the features of the particular mortgage. |
| Interest rates | Often higher than closed mortgages due to prepayment flexibility | Usually lower than an open mortgage. In most cases the interest savings of a closed mortgage outweighs the flexibility of an open mortgage. |
| When you should consider |
|
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| Penalty for breaking the mortgage term early | None | Usually the greater of 3 months interest or the interest rate differential (IRD), a formula used by the lender that you can find in your mortgage contract |
| How to qualify | Pass the mortgage stress test | Pass the mortgage stress test |
What’s next?
Now that you understand more about open and closed mortgages, you can contact an advisor to:
Discuss what type of mortgage best meets your needs
Confirm the size of mortgage you can afford
Check for a competitive mortgage interest rate
The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.
