Open vs Closed Comparison
| Feature | Open Mortgage | Closed Mortgage |
|---|---|---|
| Interest rate | Higher (0.5-1%+) | Lower |
| Prepayment | Unlimited | Typically 10-20%/year |
| Penalty to break | None or minimal | 3 months int. or IRD |
| Flexibility | Maximum | Limited |
| Best for | Short-term, selling | Long-term ownership |
| Popularity | ~5% of mortgages | ~95% of mortgages |
Current Rate Comparison (2026)
| Term | Open Rate | Closed Rate | Difference |
|---|---|---|---|
| Variable | 6.20% | 5.30% | 0.90% |
| 1 Year Fixed | 6.50% | 5.00% | 1.50% |
| 3 Year Fixed | 6.70% | 4.50% | 2.20% |
| 5 Year Fixed | 6.90% | 4.30% | 2.60% |
*Rates are illustrative; actual rates vary by lender and qualification.
Cost Comparison Example
$500,000 Mortgage Over 1 Year
| Mortgage Type | Rate | Monthly Payment | Annual Interest |
|---|---|---|---|
| 1-Year Open | 6.50% | $3,389 | $32,500 |
| 1-Year Closed | 5.00% | $2,923 | $25,000 |
| Open costs more | — | $466/month | $7,500/year |
When to Choose Open Mortgage
Good Reasons for Open
| Situation | Why Open Works |
|---|---|
| Selling within 6-12 months | No penalty on sale |
| Expecting inheritance | Can pay off anytime |
| Bonus/commission coming | Unlimited lump sums |
| Bridging period | Short-term flexibility |
| Interest rates dropping fast | Convert to fixed |
| Want to switch lenders quickly | No penalty lock-in |
Open Mortgage Scenarios
| Scenario | Open Benefit |
|---|---|
| House listed for sale | Pay off when sold, no penalty |
| Year-end bonus expected | Deposit entire $50,000 |
| Refinancing in 6 months | Switch freely |
| Inherited property settling estate | Flexible payoff timeline |
When to Choose Closed Mortgage
Good Reasons for Closed
| Situation | Why Closed Works |
|---|---|
| Stable homeowner | Lower rate saves money |
| 5+ year horizon | Maximize savings |
| Predictable finances | Don’t need extra flexibility |
| Rate shopping | Want lowest rate |
| Most Canadians | Standard choice |
Closed Mortgage Prepayment Options
| Lender Type | Annual Lump Sum | Payment Increase |
|---|---|---|
| Big 5 banks | 10-15% | 10-15% |
| Credit unions | 15-20% | 15-20% |
| Monoline lenders | 15-20% | 15-20% |
| Some lenders | 20%+ | 20%+ |
Example: $500,000 mortgage with 20% prepayment = $100,000/year extra allowed.
Breaking Your Mortgage
Closed Mortgage Penalties
| Penalty Type | Calculation | When Applied |
|---|---|---|
| 3 Months Interest | Principal × Rate × 0.25 | Minimum penalty |
| IRD (Interest Rate Differential) | Complex calculation | When rates drop |
| Higher of the two | Varies | Lender decides |
IRD Example
| Factor | Value |
|---|---|
| Original rate | 5.50% |
| Current rate (same term) | 4.00% |
| Rate difference | 1.50% |
| Time remaining | 3 years |
| Balance | $400,000 |
| IRD penalty | ~$18,000 |
IRD penalties can be shockingly high when rates drop.
Open Mortgage Penalties
| Situation | Penalty |
|---|---|
| Fully open | $0 or admin fee (~$200) |
| Convertible open | May have conditions |
| Pay off completely | Usually nothing |
Convertible Mortgages
| Feature | Details |
|---|---|
| What it is | Open mortgage that converts to closed |
| Benefit | Open flexibility, can lock in rate |
| Common terms | 6-month, 1-year |
| Conversion | Same lender, posted or lower rate |
Good for: Testing variable rates but wanting option to lock in.
Variable vs Fixed (Closed)
| Type | Rate Movement | Penalty | Best When |
|---|---|---|---|
| Variable closed | Moves with prime | 3 months interest | Rates stable/dropping |
| Fixed closed | Locked in | IRD (higher) | Rates rising |
Variable closed mortgages have much lower penalties than fixed closed.
Prepayment Strategies (Closed)
Maximize Allowed Prepayments
| Strategy | How It Works |
|---|---|
| Annual lump sum | Make max payment Jan 1 |
| Payment increase | Raise monthly payment |
| Accelerated biweekly | 26 payments = 1 extra month |
| Round up payments | Extra goes to principal |
| Double-up payments | Some lenders allow |
Impact of Prepayments
| Extra Payment | Years Saved | Interest Saved |
|---|---|---|
| $5,000/year | 3.5 years | $45,000 |
| $10,000/year | 6 years | $78,000 |
| $20,000/year | 9 years | $105,000 |
*On $500,000 mortgage at 5%, 25-year amortization.
Hybrid Approach
Split Mortgage
| Portion | Type | Benefit |
|---|---|---|
| 80% | Closed (lowest rate) | Savings |
| 20% | Open (flexible) | Pay off anytime |
Some lenders allow splitting your mortgage.
Decision Framework
| Choose Open If… | Choose Closed If… |
|---|---|
| Selling soon | Staying 3+ years |
| Expecting windfall | Stable finances |
| Want to switch lenders | Rate shopping can wait |
| Short-term bridge | Long-term ownership |
| Testing the market | Want best rate |
| Rate environment uncertain | Comfortable locking in |
Questions to Ask Your Lender
| Question | Why It Matters |
|---|---|
| What are prepayment privileges? | Know your limits |
| How is IRD calculated? | Banks vs. monolines differ |
| Can I port the mortgage? | If moving |
| What’s the conversion rate? | For convertible |
| Are there discharge fees? | Extra costs |