Open Mortgage

An open mortgage is a mortgage you can prepay, in part or in full, at any time during its term without a prepayment penalty. In exchange for that flexibility, lenders typically charge a higher interest rate than they would on a comparable closed mortgage of the same term.

In Canada, open and closed describe prepayment terms, not the interest rate itself. An open mortgage can be fixed-rate or variable-rate, insured or uninsured. What changes is how much you may pay down early and what it costs to do so.

How an Open Mortgage Works

A closed mortgage normally limits early repayment to a set prepayment privilege, often a percentage of the original principal each year, and charges a penalty to break it, calculated as three months' interest or an interest rate differential (IRD), whichever is greater. An open mortgage removes those limits. You can make lump-sum payments, raise your regular payment, or pay the balance off entirely and discharge the mortgage without a penalty.

That freedom has a price. Because the lender cannot count on a predictable stream of interest, it usually prices open mortgages above closed ones. The gap varies by lender, term, and rate type, so it is worth comparing both options side by side. The open vs closed mortgage guide walks through the trade-offs.

Open vs Closed at a Glance

Feature	Open mortgage	Closed mortgage
Prepayment limits	None	Set by the prepayment privilege
Penalty to pay off early	None	Usually three months' interest or the IRD
Interest rate	Typically higher	Typically lower
Common use	Short terms, expected lump sums	Standard long-term financing

When an Open Mortgage May Fit

Open terms suit borrowers who expect a large lump sum, from selling a home, an inheritance, or a business sale, or who want the option to clear the balance on short notice. They are also used for short-term financing between a purchase and a planned refinance or renewal.

Two points matter. First, qualification rules do not change: at a federally regulated lender you must still pass the federal mortgage stress test and meet the lender's GDS and TDS limits, whatever your prepayment terms. Second, a rate premium compounds over a longer term, so an open mortgage is usually a short-term tool. Some lenders allow conversion to a closed term later; ask whether mid-term conversion is permitted and whether any fee applies.

Frequently asked questions

Is an open mortgage always more expensive?

Typically yes, because the lender takes on the risk that you repay early. The size of the premium varies by lender, term, and rate type. Even so, paying off an open mortgage early avoids the penalty a closed mortgage would trigger, so compare the total cost rather than the rate alone.

Can I switch from an open mortgage to a closed one?

Many lenders allow it, sometimes through a convertible mortgage, but rules differ and a new rate may apply. Ask your lender whether conversion is allowed mid-term, whether there is a fee, and how the change affects your remaining amortization before you commit.

Does an open mortgage avoid the mortgage stress test?

No. Prepayment terms and qualification rules are separate. If you borrow from a federally regulated lender, you must still qualify at the stress test rate and meet the lender's gross debt service and total debt service requirements, just as you would with a closed mortgage.