Key takeaways
- →An open mortgage can be paid off in full or in part at any time with no prepayment penalty; a closed mortgage has defined prepayment privileges beyond which a penalty applies, disclosed under federal rules before signing.
- →Open mortgages generally carry a higher rate than closed ones, since the lender is compensated for the added flexibility with a rate premium.
- →Closed mortgages dominate the Canadian market because most borrowers don't need unlimited prepayment flexibility and prefer the lower rate.
- →Closed doesn't mean locked solid — built-in prepayment privileges (an annual lump sum, an increased payment percentage) still allow meaningful extra payments without triggering a penalty.
A client who assumes every mortgage works the same way is usually picturing a closed one without knowing it — and doesn't realize an open mortgage exists as a genuinely different, if more expensive, option.
Here's what actually separates the two, why an open mortgage costs more, which clients actually benefit from that flexibility, and what a closed mortgage still allows without triggering a penalty.
01 · What's structurally different between an open and a closed mortgage?
An open mortgage can be paid down, or paid off entirely, at any point during the term with no prepayment penalty. A closed mortgage instead comes with defined prepayment privileges — commonly an annual lump-sum allowance and an increased-payment allowance — beyond which a penalty applies.
Lenders are required, under the federal Code of Conduct governing mortgage prepayment information, to clearly disclose how that penalty is calculated on a closed mortgage before a borrower signs, in plain language rather than buried in fine print.
02 · Why do open mortgages usually carry a higher rate than closed ones?
The lender is compensated for giving up prepayment certainty with a rate premium — an open mortgage can be paid off unexpectedly at any point, which affects the lender's own funding and planning, and the rate reflects that risk.
Closed mortgages dominate the Canadian market for the reverse reason: most borrowers don't need unlimited prepayment flexibility during a given term, so the lower closed rate is simply the better deal for them.
03 · Which clients actually benefit from an open mortgage?
It fits a narrower set of situations well: a client expecting a lump sum within months — sale proceeds from another property, an inheritance, a bonus — who plans to pay the mortgage down significantly or in full once it arrives, or a short-term bridge scenario ahead of a property sale or redevelopment.
It's not a default recommendation. For a client without a concrete, near-term reason to need that flexibility, the rate premium usually isn't worth paying.
04 · Does 'closed' mean a client can't make any extra payments at all?
No — closed mortgages built in Canada typically include prepayment privileges, such as an annual lump-sum allowance (often a percentage of the original principal) and the ability to increase the regular payment amount up to a set percentage, both without triggering a penalty.
Those privileges are worth using deliberately before assuming a full break is necessary — see our companion piece on porting vs. breaking a mortgage for the fuller comparison when a client needs more than the built-in privileges allow.
Explain the trade-off clearly, every time
Make the open-vs-closed math part of every pre-approval conversation.
Treadstone's fulfillment associates keep prepayment-privilege details on file and ready, so this conversation doesn't get rushed at commitment stage.
Frequently asked questions
This article is general information to help you scale — not a substitute for tailored advice on your specific business, licensing, or compliance obligations. All figures are illustrative examples for planning purposes; actual costs vary by province, market, and brokerage.