Open vs Closed Mortgage: Key Differences and How to Choose

When buying a house in Canada, you can use several mortgage plans, but ultimately, these mortgages can be categorized under two main mortgage types: closed vs open mortgage. Both mortgage types require more or less the same qualifications, but there are some key differences, and you should choose one based on your financial situation. Let’s see how these mortgage plans differ and which is best for you.

What is an Open Mortgage?

An open mortgage makes it possible for you to pay off the mortgage early. If good things are expected to happen in your finances (e.g., receiving a bonus or inheritance), open mortgages offer flexible terms that allow you to pay the mortgage early without penalty.  

What is a Closed Mortgage?

Closed mortgages have stricter terms and conditions. For example, they include a prepayment limit, and if your annual payments exceed this limit, you will have to pay the penalty. Closed mortgages are suitable for borrowers with a steady average income.

Open vs Closed Mortgage: Key Differences

The primary difference between open and closed mortgages is their flexibility, which can be defined in several features.

Open vs Closed Variable Mortgage

In variable-rate mortgages, the interest rate depends on the changes in the lender’s prime rate.  Therefore, unlike fix-rate mortgages, your mortgage payments may increase or decrease based on the interest rate. Variable-rate mortgages can be either open or closed. Click to learn more about Fixed vs Variable Mortgage Rates.

To illustrate, if you’re planning to sell your home after six months, an open variable mortgage is a wiser choice since, with the sale money, you can pay off the mortgage immediately without penalty; however, if you want to stay in your home for several years, closed variable mortgage is the better choice.

Pros and Cons of Open Mortgages

Open mortgages come with several advantages, but you have to pay higher interest rates. The advantages include:

• Making unlimited payments without penalties.
• Suitable for unstable financial situations.
• Flexibility to pay off the mortgage early.

Pros and Cons of Closed Mortgages

Closed mortgages lack the flexibility to pay back the mortgage early, and you must pay a penalty if your payments exceed the prepayment limit. Also, they’re not suitable for borrowers with short-term plans or unstable financial situations. But there are considerable upsides, including:

• Lower interest rates.
• Cost-effectiveness for long-term payments.
• Possibility to save more money.
• Predictable monthly payments for easier budgeting.

How to Decide Between an Open and Closed Mortgage

Your current financial situation and your future plans are the decisive factors in choosing a closed or open mortgage. If you prefer stability and don’t expect a change in your financial prospects, closed mortgages can make budgeting your income more convenient. On the other hand, if you expect a windfall in your finances or don’t mind some fluctuations in your mortgage payments, you can benefit from an open mortgage and the payment flexibility it offers.

Choosing an open or closed mortgage can affect other aspects of your life. Therefore, if your financial situation is complicated, you should consult a mortgage advisor to make the best decision. Also, it’s strongly recommended that you get mortgage life insurance in case things go south.

Frequently Asked Questions

Can an open mortgage be paid off at any time?

Yes, you can completely pay off open mortgages without incurring any penalties.

Can you break an open mortgage?

Yes, open mortgage terms can change to any other terms at any time. You can break an open mortgage as it is designed for maximum flexibility.

Can you refinance a closed mortgage?

It’s possible to refinance a closed mortgage, but you have to pay a penalty, which is calculated as the greater of three months’ interest or the interest rate differential (IRD).

The Bottom Line

Open mortgages are suitable for short-term financial goals and borrowers who do not want to stay in their house for longer than a year. On the contrary, closed mortgages offer more stability and best serve the interest of borrowers who want to stay in their homes for an infinite time. Therefore, the key difference between open and closed mortgages is the flexibility in how you can pay the mortgage back.