MORTGAGE BASICS · EXPLAINED
Open vs closed: which mortgage actually fits you?
Most Canadians end up with a closed mortgage — and for good reason. But the right one for you depends on your plans, not just the rate on the page. Here's the honest, plain-language version: how each one works, what you actually pay for the flexibility, and the questions Rahul would walk you through before picking one.
Educational only — not personalized financial advice. Your file, your goals, and current market rates all matter. That's the conversation to have with Rahul.
Closed mortgage
The standard mortgage in Canada — you lock a rate for a term (6 months to 10 years) in exchange for a lower rate.
- Your rate
- Locked for the full term, lower than open
- Your monthly payment
- Same every month — predictable
- Prepayment privileges
- Most lenders allow ~10–20% of original principal per year plus increased payments, with no penalty — privileges vary a lot by lender.
- Break penalty
- Greater of 3 months' interest or the Interest Rate Differential (IRD) for fixed-rate closed; 3 months' interest for variable-rate closed — can be thousands of dollars if you break early.
A good fit if…
- Staying in the home 5+ years
- You want the lowest possible rate
- Comfortable planning around prepayment privileges rather than full flexibility
Watch out: The IRD penalty on a fixed closed mortgage can catch people off guard if life plans change (job relocation, sale, refinance) — worth understanding before you sign, not after.
Open mortgage
Pay off part or all of the mortgage any time, with zero penalty — in exchange for a meaningfully higher rate.
- Your rate
- Noticeably higher than a comparable closed rate — often several percentage points more
- Your monthly payment
- Same structure as closed, but the higher rate means a bigger payment on the same loan amount.
- Prepayment privileges
- Unlimited — pay any amount, any time.
- Break penalty
- None — that's the entire point of an open mortgage.
A good fit if…
- Selling or relocating within the next year or two
- Expecting a lump sum (bonus, inheritance, sale proceeds) you want to put straight to the mortgage
- Bridging between two properties
Watch out: Most people don't need this much flexibility, and the rate premium adds up fast — run the numbers before assuming 'open' is the safer choice.
A 30-second mental model
Closed is the discount for commitment. Open is the price of freedom.
A closed rate is lower because you're giving the lender certainty — they know you'll be there for the term. An open rate is higher because the lender is giving you the flexibility instead — you can walk away any day without a penalty.
Neither is "smarter." It's about matching the structure to how long you'll actually keep the mortgage.
The real cost difference
On a $500,000 mortgage, the rate gap between open and closed can mean hundreds of extra dollars a month — especially in the early years, when most of the payment is interest.
For most homeowners staying more than a couple of years, a closed mortgage with strong prepayment privileges ends up cheaper than an open one — even though "closed" sounds like the more restrictive option on paper. The privileges most lenders offer (10–20% a year, plus payment increases) cover almost everything a real-world borrower actually does.
Breaking a closed mortgage — what the penalty actually looks like
If you break a closed mortgage before the term is up, the lender charges a penalty. The formula depends on whether your rate is fixed or variable:
Fixed-rate closed
Greater of 3 months' interest or the IRD
The Interest Rate Differential (IRD) factors in how far rates have moved since your mortgage was signed. When rates have dropped, the IRD can be far larger than 3 months' interest — sometimes tens of thousands of dollars on a big-bank mortgage.
Variable-rate closed
3 months' interest
Almost always just three months' interest — no IRD math. That's one of the quiet advantages of variable that doesn't show up in the rate itself.
Four honest questions to ask yourself
Forget "which sounds safer?" for a minute. These are the questions that actually decide it for most people.
How long do I realistically expect to keep this mortgage?
If there's a real chance you'll sell or move in the next 1–2 years, open (or a short closed term) protects you from a penalty.
Would I actually use unlimited prepayment privileges, or would 10–20% a year already cover my extra payments?
Most people never hit the closed-mortgage prepayment ceiling. If you're not going to use the flexibility, you're paying a premium for nothing.
Am I expecting a lump sum soon — inheritance, bonus, sale proceeds?
If yes, open might be worth the rate premium for a short window. Otherwise a closed mortgage with strong prepayment privileges usually wins.
Do I know what my penalty would be if my plans changed?
Most people don't, and it's worth finding out before signing, not after. The IRD math on a fixed closed mortgage can be a nasty surprise.
What Rahul actually looks at with you
When a client asks Rahul "open or closed?", he doesn't answer with a guess about rates. He walks through a short list:
- Lender-specific prepayment privileges — they vary a lot, and a generous closed lender can beat an open mortgage for most borrowers.
- Whether a lender offers a blended open/closed split for people who want a bit of both.
- Your realistic timeline in the home — not the plan you'd like to have, the one that's most likely.
- Upcoming life changes: a possible sale, relocation, or a lump sum on the horizon.
- The actual penalty math for the specific lender being considered — not just the advertised rate.
- How the rate premium on open compares to the penalty you'd actually pay if you broke a closed term early.
Then — and only then — there's a recommendation. No pitch, no pressure, no "everyone's doing closed right now."
Want to talk it through with a human?
Tell Rahul a bit about your situation — how long you'd keep the mortgage, whether a sale or lump sum is on the horizon, how much flexibility you actually need. Fifteen minutes, no pitch, no pressure. You'll leave knowing which way to lean and why.
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