An open mortgage lets you repay any amount, or the whole balance, at any time without a penalty. A closed mortgage limits how much you can prepay each year and charges a penalty if you go beyond that or break the contract, in exchange for a lower rate. Most homeowners are in closed mortgages; an open mortgage is mainly worth its higher rate when you expect to repay the balance soon. This guide is part of our mortgage types hub.
Open vs closed: the core trade-off
| Feature | Open mortgage | Closed mortgage |
|---|---|---|
| Prepay any amount | Yes, at any time | Only up to the prepayment privileges in the contract |
| Penalty to break or repay early | None | Usually a prepayment penalty (see below) |
| Interest rate | Higher | Lower |
| Typical use | Short holding periods: an imminent sale, a lump sum on the way | Most homeowners, on terms of 3 to 5 years |
| Terms offered | Usually short terms, and more often variable than fixed | Every term from 6 months to 10 years |
Breaking a closed mortgage, paying it off early or prepaying more than your privileges allow usually costs the higher of 3 months' interest and the interest rate differential (IRD) on a fixed rate, and typically 3 months' interest on a variable rate; your mortgage contract sets the exact method and comparison rate, and a federally regulated lender must tell you how it calculates the penalty. The mortgage penalty guide shows how lenders calculate it.
What the open premium costs
Open rates sit above closed rates for the same term, and the gap varies by lender and over time, so compare current offers on our mortgage rates page. The cost of the premium is simple to estimate: the rate gap times the balance, for as long as you hold the open mortgage.
On a $500,000 balance with a 1% rate premium, the open mortgage costs about $5,000 a year in extra interest.
When open is worth it: the break-even test
An open mortgage pays off when the penalty you would pay to break a closed mortgage is larger than the extra interest you pay while the mortgage is open.
You expect to sell in 4 months. Your balance is $480,000, the closed variable rate is 4.45% and the open variable rate adds a premium of 1% to that.
- Extra interest on the open mortgage: about $400 a month, or $1,600 over the 4 months.
- Penalty on the closed variable mortgage, at three months’ interest: about $5,340.
The open mortgage comes out ahead by a wide margin. The break-even point is about 13 months: hold the open mortgage longer than that and the premium costs more than the penalty would have.
If the timeline is uncertain (the sale might take six months, or a year), run the test at the longest realistic holding period, not the hoped-for one. On a closed fixed-rate mortgage the penalty can be much larger than three months’ interest, which moves the break-even point further out.
Situations where open fits
| Situation | Why an open mortgage works |
|---|---|
| Listing the home within a few months | No penalty when the sale closes; the premium is paid for only a short time |
| A business sale, inheritance or other large sum expected soon | The balance can be repaid the day the money arrives |
| Between a sale and a purchase | A short-term need, though bridge financing is the usual tool when the closing dates don’t line up |
| An uncertain closing date on new construction | Avoids a penalty if plans change |
| Separating and selling a shared home | The timeline is often unpredictable |
Situations where closed fits
| Situation | Why a closed mortgage works |
|---|---|
| A homeowner staying put for the full term | The premium would add up to far more than any penalty avoided |
| Choosing open “just in case” | The premium is a certain cost; the need to repay early is only a possibility |
| An investment property with a stable plan | The lower rate improves cash flow, and prepayment privileges still allow extra payments |
| Moving but keeping the mortgage | Many closed mortgages can be ported to the new home; see how to port a mortgage |
Some closed mortgages have flexibility built in. A convertible mortgage is a variable-rate mortgage you can switch to a fixed rate partway through the term, usually for a fee rather than a full penalty; a short closed term is another way to limit penalty exposure without paying the open premium.
Variable open vs variable closed
Most open mortgages are variable-rate, so the most common comparison is between an open and a closed variable mortgage. The penalty on a closed variable mortgage is usually three months’ interest, which is predictable and moderate. That makes the open version hard to justify for long holding periods: a year of a one-point premium costs about what three months’ interest does at a 4% rate. The fixed vs variable comparison covers the rate-type decision itself.
Questions to ask your lender or broker
- What is the exact rate difference between the open and closed options today?
- How long do you realistically expect to hold the mortgage before repaying it?
- What would the penalty be on the comparable closed mortgage, fixed and variable?
- Would a convertible mortgage or a short closed term do the job at a lower rate?
Related reading
Sources
The figures and rules on this page come from these sources, last checked against them on September 29, 2026. How we check facts.
- Financial Consumer Agency of Canada: Breaking your mortgage contract
- Financial Consumer Agency of Canada: Mortgage fees: Prepayment penalties
- RBC: Variable Rate Mortgage | RBC Royal Bank of Canada