What is an open mortgage in Canada?

An open mortgage lets you make extra lump-sum payments, increase your regular payment amount, or pay off the entire balance at any time without paying a prepayment penalty. This flexibility comes at a cost: open mortgage rates are significantly higher than closed mortgage rates, typically 1–2 percentage points more. Open mortgages are designed for people who know they will be selling, refinancing, or receiving a large windfall in the near term.

What is a closed mortgage in Canada?

A closed mortgage has restrictions on how much extra you can pay toward the principal each year. Going beyond those limits — or breaking the mortgage early — triggers a prepayment penalty. In exchange for accepting this restriction, you get a lower interest rate than an open mortgage. Most Canadian mortgages are closed terms. Prepayment privileges on closed mortgages (typically 10–20% lump-sum per year, and 10–20% payment increase) apply within the restrictions without penalty.

What is the prepayment penalty on a closed mortgage?

For fixed-rate closed mortgages, the penalty is the greater of: (1) three months' interest on the amount prepaid, or (2) the Interest Rate Differential (IRD). The IRD is calculated as the difference between your contract rate and the current rate for the remaining term, multiplied by the balance and time remaining — and can be very large (tens of thousands of dollars) if rates have fallen significantly since you got your mortgage. For variable-rate closed mortgages, the penalty is almost always just three months' interest.

When should you choose an open mortgage in Canada?

An open mortgage makes sense when you have a clear, near-term plan to either sell the property, pay off the mortgage entirely, or refinance within 12–24 months. Specific scenarios: you are listing your home for sale but need to renew soon; you are expecting a large inheritance or business proceeds; you anticipate interest rates will drop significantly and you want the ability to refinance without a large IRD penalty. For most buyers with no near-term plans to break early, a closed mortgage at a lower rate is better.

Can you switch from a closed to an open mortgage in Canada?

Generally no — you cannot convert a closed term to an open term mid-term. If you want an open mortgage after you have signed a closed term, you would need to break the closed mortgage (paying the penalty), then take a new open mortgage. In most cases, it is better to simply wait until the closed term matures and then take an open or shorter term at that point.

Do closed mortgages have any prepayment privileges?

Yes. Most Canadian lenders allow closed mortgage holders to make extra payments within defined limits each year without penalty. Common prepayment privileges: lump-sum annual payments of 10–20% of the original principal (e.g., make a $35,000 lump sum on a $350,000 mortgage penalty-free), plus increase regular payment amounts by 10–20%. Check your specific mortgage contract for your lender's exact privileges, as they vary.

What happens at the end of a closed mortgage term?

When a closed mortgage term matures, you enter a renewal window. At renewal, the closed restrictions expire — you can switch lenders, change terms, or pay down any amount penalty-free. You then sign a new term (open or closed). Most Canadians renew into another closed term with competitive rates. If you do nothing, many lenders automatically renew you into a short open term at a higher rate, which is something you want to avoid by actively managing your renewal.

Difference Between Open and Closed Mortgages in Canada

When shopping for a mortgage in Canada, you will encounter two fundamental types: open and closed. Most Canadians end up with a closed mortgage — but understanding the difference explains why, and when open makes sense.

The fundamental trade-off

Feature	Open Mortgage	Closed Mortgage
Interest rate	Higher (typically +1–2%)	Lower
Extra payments	Unlimited, anytime	Limited to annual prepayment privileges
Pay off early	Yes, without penalty	Large penalty (IRD or 3 months’ interest)
Break mortgage early	No penalty	Penalty applies
Best for	Short-term holders, imminent sale	Most buyers planning to hold the term
Typical term lengths	6 months to 1 year	1–10 years (5-year most common)

Open mortgages in detail

An open mortgage gives you maximum flexibility. You can:

Make any size lump-sum payment at any time
Increase your regular payments by any amount
Pay out the entire mortgage balance with no penalty
Refinance to a new product at any time

The rate premium

Open mortgages carry significantly higher interest rates than equivalent closed terms. A lender pricing a 5-year fixed closed mortgage at 5.00% might price the equivalent open term at 6.50–7.00% or more.

Example: On a $400,000 mortgage, a 1.50% rate premium costs approximately $6,000 more per year in interest. If you are keeping the open mortgage for only 6 months before selling, that might cost you $3,000 — which you would need to compare against a closed mortgage’s estimated break penalty.

Who benefits from open mortgages

Homeowners listing their property for sale but whose current term is expiring before the expected sale date
Borrowers expecting a large lump-sum (inheritance, business sale, RRSP maturation) that will pay off the mortgage
Borrowers who believe rates will drop significantly and want to refinance without penalty
Purchasers in unusual situations (bridge financing, short-term holding strategy)

Closed mortgages in detail

A closed mortgage offers a lower interest rate in exchange for accepting restrictions on how much extra you can pay during the term. Breaking a closed mortgage before its maturity date triggers a prepayment penalty.

Prepayment privileges within a closed mortgage

Most closed mortgages offer prepayment privileges that let you pay down the principal faster without triggering penalties:

Privilege type	Typical range	Example
Annual lump-sum payment	10–20% of original principal	On $400K: $40,000–$80,000/year penalty-free
Payment increase	10–20% of regular payment	Increase $2,000/month payment by $200–$400 penalty-free
Double-up payments	Some lenders allow doubling one payment per month	Ad hoc extra principal payments

These privileges are reset annually — unused room does not carry forward to the next year in most cases.

Breaking a closed mortgage: the penalties

If you need to break a closed mortgage mid-term (to sell, refinance, or pay off), the lender charges a penalty:

Variable-rate closed mortgage penalty: Almost always three months’ interest on the outstanding balance.

Example: $350,000 balance at 5.25% variable → 3 months’ interest = $350,000 × 5.25% ÷ 4 = $4,594

Fixed-rate closed mortgage penalty: The greater of:

Three months’ interest
Interest Rate Differential (IRD)

The IRD is where large penalties come from. It compensates the lender for the difference between your contract rate and what they can lend the money out at today for the remaining term.

IRD Example:

Original mortgage: $400,000 at 5.50% fixed, 5-year term
Breaking after 2 years: 3 years remaining
Current 3-year rate: 4.00%
IRD = ($400,000 × (5.50% − 4.00%)) × 3 years = $400,000 × 1.50% × 3 = $18,000

If rates have dropped significantly since you took your mortgage, IRD penalties can reach $20,000–$50,000+ on larger mortgages. This is the primary reason most Canadians keep their closed mortgages to maturity.

Variable-rate mortgages: also open or closed

Variable-rate mortgages (VRMs) can also be structured as open or closed:

Variable open: Rate fluctuates with prime; no penalty to break. Uncommon, higher rate.
Variable closed: Rate fluctuates with prime; three months’ interest to break. Most common variable option.

Variable closed is popular because the three-months’-interest penalty is predictable and typically much smaller than a fixed-rate IRD penalty. This makes variable mortgages more “open-like” in practice, even when technically closed.

Rate comparison example (2026 illustration)

Product	Example rate	Break penalty if breaking 2 yrs in ($400K)
5-year fixed closed	5.00%	$15,000–$25,000 (IRD, rate-dependent)
5-year variable closed	4.75%	~$4,700 (3 months’ interest)
1-year fixed closed	5.25%	3 months’ interest (short remaining term)
6-month open	6.75%	No penalty
1-year open	6.50%	No penalty

The shorter the closed term, the smaller the potential penalty — which is why some borrowers in uncertain situations choose a 1-year closed term rather than a 5-year closed or a 1-year open.

How to decide: open or closed?

Choose open if:

You plan to sell within 12–18 months
You are expecting a windfall that will pay off the mortgage entirely
You believe rates are about to fall sharply and you want the ability to refinance without a penalty
You cannot predict your situation and need maximum flexibility (and can absorb the rate premium)

Choose closed if:

You plan to hold the property for the full term
You want the lowest available rate
You are comfortable using the built-in prepayment privileges for any extra payments
You have a variable-rate mortgage (where three-months’ interest penalty is small and predictable)

At renewal: the open window

When your closed term matures, you have a brief open window — typically 120 days before the maturity date — during which you can:

Switch lenders without penalty
Pay down any amount of principal
Change the mortgage structure entirely
Negotiate your new rate aggressively

This renewal window is when you have the most leverage. Do not miss it by letting the lender automatically renew you — auto-renewals typically go into posted rates, not discounted rates.