Open Vs Closed Mortgages: How They’re Different

When you’re buying a home or refinancing in Ontario, choosing the right type of mortgage is a key part of the process.

One of the most common decisions borrowers face is whether to go with an open or closed mortgage. Both options are available across Canada, but they work very differently and can affect your finances in significant ways.

An open mortgage gives you more flexibility with repayments, while a closed mortgage usually comes with a lower interest rate. Depending on your goals—like how long you plan to keep the home or how soon you may want to pay off the loan—one option may work better than the other.

In this article, we’ll break down the differences between Open Vs. Closed Mortgages, how each one works, and what to think about before making your choice.

If you’re planning a real estate move in Toronto or anywhere in Ontario, this guide can help you make an informed decision that fits your needs.

What Are Open And Closed Mortgages?

Mortgage options break down into two main types:

Open Mortgages

An open mortgage gives you full freedom to pay back your loan in part or in full at any time. You face no penalties for making extra payments or paying it off early.

• Terms typically range from 6 months up to 5 years.
• Banks price them higher to cover the flexibility they offer. That often means higher in interest compared to closed rates to compensate for the increased flexibility.
• They’re ideal when you expect a lump sum soon—like a bonus, inheritance, or plan to sell/refinance quickly .
• At term-end, you can either pay off the balance or renew/refinance without penalties.

Closed Mortgages

With a closed mortgage, you agree to a set repayment schedule and term, usually 6 months to 10 years. In return, you get a lower interest rate .

• You can still make extra payments. Usually, lenders allow up to 10–20% of the principal per year without penalty .
• But if you go over that limit or break the mortgage early, you may be required to pay a penalty:
  • For fixed-rate: typically greater of 3 months’ interest or the interest rate differential (IRD).
  • For variable-rate: typically 3 months’ interest .
• Lenders often include a portability feature, so you can transfer the mortgage if you move homes .

Understanding the Cost Differences of Open Vs Closed Mortgages

When choosing between an open and closed mortgage, it’s important to look at the financial trade-offs. This means comparing how much each option could actually cost you over time.

An open mortgage gives you the freedom to repay early, but that flexibility comes at a price. The interest rate for an open mortgage is usually higher than a closed one.

For example, let’s say you get a 5-year closed mortgage at 5%, and the same term for an open mortgage is 6%. On a $600,000 loan, that 1% difference could add up to thousands of dollars in extra interest if you keep the mortgage for the full term. So unless you’re confident you’ll pay it off early, the higher rate might not be worth it.

Now, with a closed mortgage, you get a lower interest rate. That helps you save money month to month. But the downside is the penalties if you break the mortgage early.

For fixed-rate mortgages, the penalty is usually the interest rate differential (IRD), which compares your rate with current rates for the remaining term. This amount can be very high—sometimes tens of thousands of dollars—depending on your lender and how much time is left on your mortgage. For variable-rate closed mortgages, the penalty is simpler and usually equals about three months of interest.

So, the main trade-off is this:

• With open mortgages, you may pay more in interest, but you avoid penalties if you repay early.
• With closed mortgages, you save on interest, but face high penalties if you need to break the mortgage before the end of the term.

Key Differences Between Open And Closed Mortgages

Knowing the main differences between open and closed mortgages can help you pick the one that best fits your budget and your goals for becoming a landlord.

Let’s compare these two!

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What Makes Open Mortgages a Good Fit (And What to Watch Out For)

Open mortgages give you more freedom with repayments, but they come with trade-offs that may not work for everyone.

What Works Well

• Full prepayment flexibility: You can make lump‑sum payments or pay off the mortgage anytime with no penalties.
• Easier refinancing or renegotiation: You can refinance or switch to a new term without extra costs.
• Great for short‑term plans: Ideal if you expect a windfall or plan to sell the property soon.

What to Keep in Mind

• Higher interest rates: Open mortgages usually come with higher rates.
• Fewer lender options: Not all lenders offer open terms, so your choices may be limited.
• Higher cost if you don’t repay early: If you end up staying long-term, the extra interest adds up.

Why Many Choose Closed Mortgages (And Where They Have Limits)

Closed mortgages are popular in Canada for their lower rates and stable payments, though they offer less flexibility if your plans change.

What’s in Your Favour

• Lower interest rates: Usually lower than open mortgages.
• Reliable for monthly budgeting: Predictable payments help keep things steady.
• Built-in prepayment options: Many lenders let you pay up to 10–20% extra each year without penalty.
• Easier approval and less risk: More lenders offer these, often with fewer fees.

What You Should Know

• Limited payment flexibility: Going over the annual extra-payment limit brings penalties.
• Charges for breaking early:
  • Fixed-rate: Usually greater of 3 months’ interest or the interest rate differential (IRD)
  • Variable-rate: Usually 3 months’ interest
• Refinancing early can be costly: Ending the mortgage early often comes with fees.
• Variable rates can shift: If you choose a variable option, payments may change when rates rise.

When to Choose Each Mortgage Type?

Deciding between an open or closed mortgage really comes down to your plans and how flexible you want your payments to be.

An open mortgage might be a better choice if you think you’ll be able to pay off the loan early. For example, maybe you’re expecting a bonus at work, a financial gift, or an inheritance. Or you might be planning to sell your home soon or refinance within a short time. In any of these cases, it helps to have the freedom to pay off your mortgage without penalty.

Open mortgages are designed for this kind of flexibility. They allow you to make large payments or even clear the full balance whenever you’re ready—without extra fees. That’s why they might work well for people with short-term goals or uncertain timelines.

A closed mortgage, on the other hand, might be better suited for long-term stability. If you plan to stay in your home for several years and don’t expect to make large lump-sum payments, a closed mortgage will usually save you money. These come with lower interest rates, and most lenders still allow some extra payments each year—usually up to 10% or 20% of the original loan amount. As long as you stay within that limit, you won’t face penalties.

For many buyers in Toronto and across Ontario, this option might work best because it offers steady monthly payments, which makes it easier to manage your budget over time.

So, if you’re looking for flexibility and plan to pay your mortgage off early, an open plan might be right for you. But if you’re staying put and want to save on interest with a clear repayment plan, a closed mortgage might be the better fit.

Open vs. Closed in Toronto’s Market

In Toronto and across the GTA, the housing market moves fast. Prices can shift quickly, and people often buy with short or long-term goals in mind.

That’s why the choice between an open and closed mortgage is especially important here.

If you’re buying a condo downtown and only plan to live there for one or two years, an open mortgage might be a better fit. It lets you pay off the mortgage early or sell without paying a penalty. This gives you more freedom if you’re not planning to stay long.

But if you’re buying a family home in the suburbs or outside the core and you expect to stay for at least a few years, a closed mortgage might make more sense. You’ll likely get a lower interest rate, which can save you a lot over time. Even though you’ll have limits on how much extra you can pay each year, that trade-off is often worth it if your plans are stable.

Also, keep in mind that the mortgage stress test in Ontario applies to both open and closed mortgages.

So no matter which one you choose, you’ll need to qualify the same way. That includes proving you can handle a higher interest rate than the one you’re actually offered.

Bottom Line

The choice between open and closed mortgages depends mostly on your personal situation.

If you expect to receive a lump sum soon—like an inheritance or bonus—an open mortgage could be worth the higher interest rate because it lets you pay off your loan early without penalties. Similarly, if you plan to sell your home or refinance within a few years, an open mortgage can help you avoid costly early repayment fees.

On the other hand, if you’re planning to stay in your home for three years or more and don’t expect to make large extra payments, a closed mortgage often saves you money with its lower interest rate.

There isn’t a one-size-fits-all answer, so it’s important to understand your options clearly. It is strongly recommended to discuss your options with a professional, such as a mortgage broker.

The information provided above is of a general nature and should not be considered legal advice. Every transaction or circumstance is unique, and obtaining specific legal advice is necessary to address your particular requirements. Therefore, if you have any legal questions, it is recommended that you consult with a lawyer.