Overview
In Canada, mortgages are broadly categorized as open or closed, each offering distinct features tailored to different borrower needs. The choice between these products affects your flexibility, interest costs, and repayment strategy. This guide provides a detailed comparison of open and closed mortgages, tailored to current Canadian market conditions, government programs, major bank offerings, provincial nuances, and first-time homebuyer incentives.
Open Mortgage vs. Closed Mortgage
Key Definitions
- Open Mortgage: Allows you to increase payments, make lump-sum prepayments, or pay off the entire mortgage at any time without penalty. Offers maximum flexibility but typically comes with a higher interest rate.
- Closed Mortgage: Restricts prepayment options (e.g., annual lump sums or payment increases, usually up to 10–20% of the original principal each year). Early repayment beyond these limits or breaking the mortgage term incurs a prepayment penalty, but interest rates are generally lower.
Comparison Table
| Feature | Open Mortgage | Closed Mortgage |
|---|
| Prepayment Flexibility | Unlimited; no penalties for any prepayment | Limited (e.g., 10–20% per year); penalties apply beyond limits |
| Interest Rate | Higher | Lower |
| Early Termination | No penalty | Penalty (usually greater of 3 months’ interest or interest rate differential) |
| Best For | Short-term ownership, expected windfalls, or imminent sale | Long-term ownership, stable income, budgeting |
| Conversion | Can convert to any term without penalty | May convert to longer term with some products (convertible closed) |
When to Choose Each
- Choose an Open Mortgage if you plan to sell soon, expect a large sum (inheritance, bonus, sale proceeds), or want absolute flexibility to pay off your mortgage early without penalty.
- Choose a Closed Mortgage if you intend to keep your property for the full term, value lower interest rates, and do not anticipate needing to prepay beyond standard limits.
Canadian Mortgage Rates and Market Conditions
- Current Trends: Closed mortgages are far more common in Canada due to their lower rates, which generally result in significant interest savings over the term. Open mortgages are niche products, used primarily when flexibility trumps cost.
- Rate Differences: Expect open mortgage rates to be 0.5% to 1.5% higher than comparable closed mortgage rates, depending on the lender and term.
- Market Dynamics: With rising interest rates, some borrowers opt for open mortgages initially to maintain flexibility, then lock into a closed term when rates stabilize.
Canadian Government Programs and Incentives
- First-Time Home Buyer Incentive (FTHBI): A shared-equity mortgage with the Government of Canada, reducing monthly payments without increasing the down payment.
- Home Buyers’ Plan (HBP): Allows first-time buyers to withdraw up to $35,000 from their RRSPs tax-free to buy or build a home.
- GST/HST New Housing Rebate: Reduces the GST/HST paid on new homes.
- Provincial Programs: Programs vary by province (e.g., BC Home Owner Mortgage and Equity Partnership, Ontario Land Transfer Tax Rebate). Always check provincial resources for local incentives.
Major Canadian Bank Offerings
Most major Canadian banks (RBC, TD, Scotiabank, BMO, CIBC, National Bank) offer both open and closed mortgages, with closed mortgages being the default for most borrowers due to lower rates. Open mortgages are available but are positioned as specialty products for those needing maximum prepayment flexibility.
Sample Products
- RBC: Offers both open and closed mortgages, with convertible closed options that allow conversion to a longer term without penalty.
- TD: Highlights the prepayment flexibility of open mortgages and the interest savings of closed mortgages.
- National Bank: Recommends open terms for those planning to sell soon and closed terms for long-term holders.
Provincial Variations in Regulations
- Mortgage rules are federally regulated (Office of the Superintendent of Financial Institutions, OSFI), but some provinces have additional first-time buyer incentives, rebates, or tax credits.
- Alberta, Saskatchewan, Manitoba: No provincial land transfer taxes; some local rebates.
- Ontario, British Columbia: Land transfer taxes apply, with rebates for first-time buyers.
- Quebec: Unique mortgage registration fees and additional consumer protections.
Always consult a local mortgage broker or legal advisor for province-specific rules and incentives.
First-Time Homebuyer Programs Specific to Canada
- First-Time Home Buyer Incentive (FTHBI): Shared equity program to reduce monthly mortgage costs.
- Home Buyers’ Plan (HBP): RRSP withdrawal for down payment.
- Tax Credits: Federal and provincial tax credits for first-time buyers (e.g., Ontario, BC).
- Down Payment Assistance: Some municipalities and provinces offer grants or loans to assist with down payments.
Actionable Next Steps
- Assess Your Needs: Determine if you value lower interest costs (closed) or prepayment flexibility (open).
- Compare Rates: Use platforms like theratefinder to compare current mortgage rates from top Canadian lenders. The multi-step application at theratefinder.ca/onboarding provides personalized, competitive options.
- Consult Experts: Speak with a mortgage broker or bank advisor to evaluate your financial situation and explore government and provincial incentives.
- Plan for the Future: If you expect a change in your financial situation (e.g., sale, inheritance, job change), consider how an open or closed mortgage aligns with your plans.
Summary
Most Canadians benefit from the lower rates of closed mortgages, but open mortgages provide unmatched flexibility for those expecting to pay off their mortgage early. Government and provincial programs can further reduce costs for first-time buyers. Always compare rates and terms using comprehensive platforms like theratefinder, and seek personalized advice to ensure your mortgage aligns with your financial goals and life circumstances.