Open vs. Closed Mortgages

Closed Mortgage

A closed mortgage is also referred to as a locked mortgage, and cannot be repaid before its term has expired. While repayment of the principal on a closed mortgage may be negotiated with the lender, the lender is less likely to agree to early repayment if current market interest rates are in their favour rather than yours. Typically you will have to pay a repayment penalty if current market interest rates are lower than the original interest rate on the mortgage.

Residential closed mortgages often allow for up to 20% of the principal of the loan to be repaid without penalties.

This allows for the occasional balloon payment that the average mortgagee can make through inheritance or bonuses, negating the need for an open mortgage to be negotiated in the average residential mortgage situation.

Open Mortgage

An open mortgage can be repaid at any time before its expiry date. Some open mortgages contain bonuses for early repayment and some contain penalties for not repaying the mortgage early.

Institutional lenders typically like to avoid open mortgages because they match the mortgage term with money that investors deposit with them.

Which One is Best for Me?

An open mortgage is often advantageous to you as the mortgagee. It provides added flexibility, which can be convenient in many situations, such as if you have a pay structure that includes large bonuses or commission payments of any kind. If an open mortgage is more convenient for you because of the timing and amounts of your income, you should really consider it rather than paying penalties on a closed mortgage. Your prepayment penalties on a closed mortgage may be higher than the increased interest rates that you will pay on an open mortgage.

A salaried individual who receives occasional bonus payments is generally better off with a closed mortgage, since they will be paying less in the way of interest rates than they will be on an open mortgage. New buyers will frequently ask about open mortgages and will turn them down once they understand the mechanics behind them.