Open versus closed mortgages in Canada

Open does not mean costless in every respect

FCAC states that an open mortgage permits prepayment or lump sums without a penalty. The interest rate may be higher than comparable closed options, and normal discharge, administration or switching costs may still exist. Obtain a complete quote rather than assuming every transaction is free.

Open terms may suit a borrower expecting a sale, major lump sum or full repayment soon, but the higher ongoing rate can outweigh unused flexibility. The expected time in the product matters.

Closed mortgages trade flexibility for pricing

A closed mortgage can limit extra principal and charge when the borrower breaks the contract, transfers lenders or exceeds privileges. It may still offer useful annual lump-sum and payment-increase options. The word closed does not mean zero prepayment is possible.

For example, a borrower expecting a bonus compares the closed product’s confirmed privilege with an open rate for the expected holding period. If the bonus fits the privilege, paying a higher open rate solely for flexibility may not be necessary; if a sale is likely, break exposure may matter more.

Compare the two structures

1. Estimate how long the mortgage will remain in force.
2. Identify likely lump sums, sale, refinance or transfer events.
3. Record each product’s rate, term, fees and payment options.
4. Obtain the closed product’s privilege and penalty method.
5. Compare total cash and ending balance over the same horizon.
6. Stress-test the expected event arriving earlier or later.

Questions beyond the headline rate

Portability is not the same as an unconditional transfer, and a blend-and-extend offer is not automatically cheaper. Ask what happens on sale, transfer, early renewal and additional borrowing. Eligibility and property approval can still apply.

• Check whether the rate is fixed or variable.
• Ask which fees survive even on an open mortgage.
• Confirm whether privileges are annual or term-based.
• Do not assume a future lender will accept a transfer.
• Preserve cash needed for moving and closing costs.

Use a calculator as a scenario, not a promise

Model the payment and extra-principal pattern for each real quote. Add an estimated penalty only when supported by a lender figure, and compare the same horizon rather than the full amortization of one option with a short term of another.

The Canadian model converts the quoted nominal annual rate using semi-annual compounding, then derives the payment-period rate. It distinguishes standard from accelerated schedules and keeps the mortgage term separate from the remaining amortization.

The estimate holds the entered rate constant, assumes extras reach principal and cannot discover a lender’s privilege or penalty method. Compare its regular payment with your statement, and rerun at renewal or after a variable-rate change.

Review the plan before money leaves

Compare the proposed prepayment with a zero-extra case and an interrupted plan using identical dates and rate assumptions. Record the current term end even when the schedule spans the remaining amortization, because the contractual rate and privileges can change at renewal.

Keep the agreement, annual statement and lender response that states the available privilege in dollars. If the mortgage has several segments, review each rate, maturity and penalty separately rather than treating one combined balance as a single contract.

• Protect the required payment and essential household costs.
• Keep emergency and known near-term cash accessible.
• Confirm payment-increase and lump-sum privileges separately.
• Reconcile the first prepayment with the lender statement.
• Rerun at renewal, after a variable-rate move or after any contract change.