What "closed" and "open" actually mean
The closed/open distinction is about your right to prepay or break the mortgage during the term:
- Closed mortgage: You commit to the lender for the full term (typically 5 years). If you pay it off early — by selling, refinancing, or taking a lump sum from elsewhere — the lender charges a prepayment penalty.
- Open mortgage: You can pay off the mortgage entirely at any time during the term, with zero penalty. You can also refinance away without breaking anything.
Both still amortize the same way, both still have a defined rate, and both still have prepayment privileges (lump sum limits, payment increase limits) on the closed side. The difference is the consequence of trying to leave early.
The price of being open
Open mortgages are typically priced 50–150 basis points (0.5–1.5%) above the equivalent closed rate. On a $500,000 mortgage over a 5-year term, that translates to substantial extra interest:
| Open rate premium | Extra annual interest | Extra over 5 years | |---|---|---| | 50 bps | $2,500 | $12,500 | | 100 bps | $5,000 | $25,000 | | 150 bps | $7,500 | $37,500 |
Compare that to the prepayment penalty on a closed mortgage if you were to break early. A typical IRD penalty on a 5-year fixed with 2 years remaining might be $8,000–$15,000. The open premium often costs MORE than just signing closed and paying the penalty if you actually break.
When open is the right choice
Open mortgages make sense in narrow scenarios:
You're selling within 6–12 months
You're closing on a new home today but planning to sell another property soon, and the sale proceeds will fully pay off this mortgage. An open mortgage lets you pay off the day the sale closes with no penalty. A 6-month open at 50–150 bps premium often beats a 5-year closed with a $10k+ break penalty.
You're bridge-financing
You bought before selling and need short-term financing until your existing home sells. A 6-month open or convertible is purpose-built for this scenario.
Inheritance or large bonus expected
You know within the next 12 months you'll receive a lump sum large enough to pay off the mortgage. An open lets you pay off without penalty when the money arrives.
Short-term work assignment
You're on a 2-year work contract in a new city. You want to buy rather than rent but plan to sell when the contract ends. An open keeps you flexible.
You're inheriting a mortgage at renewal
The previous owner had an unusual product or term structure and you want to refinance into a standard product. A short open term while you set up the refinance avoids penalty on penalty.
When closed is right (almost everything else)
For the vast majority of Canadian buyers — 95%+ of cases — closed wins decisively. The rate savings over the term dramatically exceed the value of the optionality:
- Long-term homeowners: planning to stay 5+ years
- First-time buyers: settling in, building equity, no near-term plan to leave
- Refinance to a better rate: closed at today's best rate, no exit needed
- Investors holding rentals: long-term holds where the rate matters more than flexibility
Convertible mortgages — the middle ground
Often overlooked: the convertible mortgage. A typical structure: a 6-month closed mortgage at slightly above the 1-year posted rate, with the option to convert to a 1- to 5-year closed mortgage at any time at the rate then offered. See convertible mortgages for the full mechanics.
This gives you most of the optionality of open with a much smaller rate premium. If you might want to refinance into a longer term within 6 months but aren't sure, convertible is usually better than open.
How to actually evaluate open vs closed
Make a single decision: what's the probability I need to break this mortgage in the next 24 months?
- >50% probability (clear short-term horizon): open or convertible makes sense
- 20-50% probability (uncertain): convertible
- <20% probability (settled long-term): closed wins
If you're unsure, run the math:
Open premium cost = (open rate − closed rate) × balance × years until likely payoff
Closed penalty cost = expected break penalty × probability of breaking
Whichever is lower wins. The breaking mortgage penalty calculator shows the closed-side cost.
Open mortgage availability
Not all lenders offer open mortgages in all products:
- Variable open: most A-tier banks and monolines offer this; usually prime + 0.5% to 1.0%
- Fixed open: rarer; typically only 6-month or 1-year terms; 50-100 bps above equivalent closed
- HELOC: technically a revolving open credit; see HELOC explained
For longer fixed terms (3-5 years), genuinely open products are rare. Most lenders offer convertible or short-term open as alternatives.
What to do next
- Define your most likely exit horizon — selling, refinancing, paying off
- If <12 months: get a 6-month open or convertible quote
- If 12-24 months: compare convertible vs short closed term + accept the penalty risk
- If 24+ months: closed wins; pick your term length based on rate-cycle view
Open mortgages are a useful tool in specific scenarios. Just confirm you're in one of those scenarios before paying the premium.