What is the difference between an open and closed mortgage in Ontario?
An open mortgage lets you make lump-sum payments or pay off the entire balance at any time without paying a penalty. This flexibility comes at a cost: open mortgages usually carry a higher interest rate than closed mortgages with the same term.
A closed mortgage typically offers a lower rate but restricts how much extra you can pay down during the term. Most closed mortgages allow annual prepayment privileges of ten to twenty percent of the original principal, but if you exceed those limits or break the mortgage early, you will owe a prepayment penalty.
Choosing between open and closed depends on your plans. If you expect to sell your home, receive a large inheritance, or pay off the mortgage within a short period, an open mortgage or a shorter closed term may save you money on penalties. If you plan to stay in the property for the full term with no large windfalls coming, a closed mortgage at a lower rate usually costs less overall. A mortgage professional can model both scenarios for your specific numbers.
Key takeaways
- Open mortgages allow full prepayment anytime but charge higher rates.
- Closed mortgages offer lower rates but limit lump-sum payments and charge break penalties.
- Your plans for selling or paying off early should guide your choice.
- A mortgage broker can calculate total cost under each option.