Are you in the market for a new mortgage in Canada and want to understand all your options? With an unpredictable real estate environment, many homebuyers and homeowners are considering more flexible mortgage options, such as open mortgages.
But how exactly do open mortgages work, and are they the right products for your situation? This guide will provide you with everything you need to know about open mortgages in Canada.
What is an open mortgage?
An open mortgage is a flexible option that allows borrowers to pay off the mortgage principal at any time without penalties. You can pay lump sums, increase your payment amounts, or even pay off the entire mortgage early with no prepayment charges.
Open mortgages differ from closed mortgages, which charge a penalty fee if you break the mortgage, refinance, or pay off your mortgage before the full term. Closed mortgages allow some prepayment but are usually limited to 10-20% of the mortgage annually.
Is open mortgage popular in Canada?
Open mortgages are less prevalent in Canada than closed mortgages despite their many advantages, including flexible payments. According to the 2024 CMHC Mortgage Consumer Survey, 69% of Canadians select fixed-rate mortgages for financial stability and lower rates.
These mortgages appeal to first-time home buyers and current homeowners looking to refinance or renew their mortgages. More borrowers are considering mortgages that allow prepayments if they foresee needing extra funds soon.
What are the term lengths available for open mortgages?
Open mortgages are offered in much shorter terms than closed mortgages. Here are the 5 terms available:
| Term | Feature |
|---|---|
| 6 months | The shortest term, giving maximum flexibility. Only offered by some lenders. |
| 1 year | A short term that allows you to renegotiate your rate annually if rates decline. |
| 2 years | Rarely offered. It may have higher rates than 3 or 5 years. |
| 3 years | A good compromise between flexibility and reasonable rates. |
| 5 years | The most common and longest term. Rates are lowest. |
The shorter your mortgage term, the more often you’ll have to renew your mortgage, face application costs, and run the risk of higher rates at renewal. But you’ll also benefit if rates fall.
Carefully weigh whether the lower rates on a longer term outweigh the flexibility of a shorter term for your situation.
What are the advantages of open mortgages?
Before making a decision, carefully weigh its pros and cons and consider both your short-term and long-term financial goals. Open mortgages bring the following benefits for borrowers:
Faster your payments
The main benefit of an open mortgage is the flexibility it provides. You can:
- Pay off your mortgage in full at any time
- Switching from monthly to bi-weekly or weekly accelerated payments
- Make extra lump sum payments on your principal
- Make an extra monthly payment on top of your regular payment up to a specified limit
- Refinance your mortgage whenever you want
- Switch lenders without early payout charges
- Convert to a closed mortgage if you want to lock in a rate
This flexibility enables borrowers to take advantage of financial windfalls, sell their homes, or refinance when rates drop without facing hefty fees. If utilized wisely, this can save thousands in interest costs over time. Always confirm the specific prepayment rules before committing to avoid surprises.
Lower or no penalty
If you need to break your open mortgage early for any reason, you won’t pay expensive prepayment penalties like a closed mortgage. Closed mortgage penalties can be three months of interest or more.
Peace of mind
Choosing an open mortgage provides peace of mind that you can sell your home, refinance, or make extra payments at any time that suits your financial needs. You aren’t locked in long-term.
What are the cons of open mortgages?
Also, consider these three disadvantages:
Higher interest rates
The main disadvantage of this type of mortgage is that its interest rates are typically higher than comparable closed mortgage rates from the same lender over a 5-year term, which can add up to thousands in extra interest costs.
Limited availability
Not all lenders offer open mortgages, and when they do, the terms and options may be more restricted than those of closed mortgages from the same lender.
Less payment stability
Because the terms are shorter, you will have to renew your mortgage and apply more often, facing the risk of higher rates at each renewal. Closed terms of up to 10 years provide more payment stability.
If interest rates have risen significantly by the time your short-term expires, your payments could rise sharply upon renewal. A longer closed term may provide more protection.
In summary, an open mortgage makes sense if
- If you plan to sell soon and want to pay off the mortgage early
- You have variable or unpredictable income and wish to make extra lump sum payments when surplus funds are available
- You are first-time homebuyers seeking flexibility
- You anticipate a financial windfall
Your mortgage broker or advisor can help you determine whether an open or closed mortgage is better suited to your specific financial situation and goals.
How do you apply for an open mortgage in Canada?
Here are the key requirements of the application process for getting an open mortgage in Canada:
Documentation required
Like any mortgage, you’ll need to provide:
- Proof of income and employment
- Down payment funds and assets
- Tax documents
- ID and address verification
- Credit check consent
Mortgage brokers and lenders will use this to assess your eligibility. Having all documents ready can help speed up the process.
Working with a mortgage broker vs. a direct lender
You can apply for an open mortgage directly through a bank/lender or an independent mortgage broker. Mortgage brokers can access multiple lenders and help you find the best rate. They also handle the application paperwork for you. Direct lenders may offer mortgage products online, or their specialists can assist you. They have access to these products.
Pre-approval and qualifying process
Most lenders and brokers offer free pre-approvals or pre-qualifications to confirm the open mortgage amount you qualify for before making a purchase offer.
Both open and closed mortgages in Canada require mortgage stress testing to qualify based on your debt ratios and ability to pay if rates rise, and assess whether you can repay your mortgage if rates increase in the future.
Alternatives to an open mortgage to consider
Open mortgages provide unique flexibility compared to closed mortgages. But in some situations, you may want to consider alternative mortgage products or strategies instead:
- Short-term closed mortgage: A one-year closed term allows you to renegotiate your rate annually while enjoying lower closed mortgage rates.
- Home equity line of credit: Gives you a revolving credit limit to access extra funds when needed. You repay the interest monthly.
- Private mortgage: Borrow from a private lender or individual investor for custom mortgage terms and rates if you qualify.
- Wait for better rates: If you aren’t in a rush, you may opt to keep monitoring rates and lock into a lower closed rate when favourable.
Discuss your goals and options with mortgage brokers and financial advisors to choose the optimal strategy. An open mortgage isn’t necessarily your only flexible choice.
The bottom line
Open mortgages can give many borrowers the flexibility they need in unpredictable times. But when choosing an open vs. closed mortgage, it’s important to weigh the pros and cons carefully against your short – and long-term financial goals.
The brokers at Best Mortgage Online can help you find the ideal mortgage product for your unique home financing needs. Contact us today!
FAQs about open mortgages
Can I get an open mortgage for a 10-year term in Canada?
No, open mortgage terms max out at 5 years. You need a closed mortgage for longer 10-year terms.
What are the penalties for breaking an open mortgage in Canada early?
Unlike closed mortgages, open mortgages have no prepayment penalties in Canada if you break your term early.
How often do I renew an open mortgage in Canada?
Open mortgages have shorter terms of 6 months to 5 years, so you renew more frequently than a closed mortgage with a longer term
Can I switch between open and closed mortgages in Canada?
Yes, you can switch mortgage types when you renew or refinance, with no penalties for switching from open to closed or vice versa.
Do open mortgages affect your credit score in Canada?
No, having an open mortgage does not directly impact your credit score compared to other mortgage types. Make payments on time.
What are prepayment options for open mortgages in Canada?
Common options include lump sums, increased payments, double-ups, accelerated frequency, and paying off the full balance.
How do open mortgage rates compare to closed mortgage rates in Canada?
Open mortgage rates from the same lender in Canada typically 1% higher than closed mortgage rates. Always compare both.
