Open and closed mortgages differ in one main way: how much extra you can pay toward the balance without a penalty. That choice changes what it costs to sell, refinance, or pay the loan off early.
Open mortgage
An open mortgage lets you make a prepayment or lump-sum payment without a penalty, including paying the full balance. The trade-off is usually a higher interest rate than a closed mortgage with the same term.
Closed mortgage
A closed mortgage limits prepayments. Most lenders set a prepayment privilege in the contract, such as a lump sum up to a set percentage of the original mortgage each year, or a higher regular payment up to a set percentage. Unused privileges usually do not carry over to the next year.
What it costs to go past the privilege
Paying more than the privilege allows on a closed mortgage usually triggers a prepayment charge. The charge is often the interest rate differential on a fixed rate, or three months’ interest on a variable rate. The breaking a mortgage guide shows how each is estimated.
Use your privilege every year
If you can afford it, pay the full prepayment privilege each year. Privileges are usually lost when they are not used, so a missed year is money you cannot pay down later under the same terms.
Check the contract, not the rate alone
Privilege limits vary by lender and by product, so read the prepayment terms in the mortgage agreement. Compare the rate, the penalty formula, and the prepayment amount together. A lower closed rate can cost more than an open mortgage if you expect to sell, refinance, or prepay a lot.
Try the canadian mortgage calculator →
Official source
FCAC · Mortgage fees: prepayment penalties
This guide explains general rules. Confirm your figures with your lender, lawyer, or the official source before you act.