Two mortgages can both have variable interest rates yet give you very different freedom to leave the contract. The interest rate tells you what can change during the term. The open or closed designation tells you what happens when you want to repay the mortgage early. An open variable rate mortgage combines a changing interest rate with unrestricted penalty-free prepayments. A closed variable rate mortgage also has a rate that can rise or fall, but early repayment is limited by the contract. Going beyond those limits or breaking a closed mortgage can trigger a prepayment penalty.
- Open vs. Closed Variable Rate Mortgages at a Glance
- How an Open Variable Rate Mortgage Works
- How a Closed Variable Rate Mortgage Works
- Your Variable Rate Can Affect Your Payments Differently
- What Happens If You Want to Leave Before the Term Ends?
- Which Features Should You Compare?
- Other Questions About Open and Closed Variable Mortgages
Open vs. Closed Variable Rate Mortgages at a Glance
| Feature | Open Variable Mortgage | Closed Variable Mortgage |
|---|---|---|
| Interest rate | Can rise or fall | Can rise or fall |
| Extra principal payments | No prepayment penalty | Limited by the contract |
| Paying off the balance early | No prepayment penalty | A penalty may apply |
| Breaking the mortgage | No prepayment penalty | Normally involves a penalty |
| Repayment flexibility | Greater | More restricted |
The variable-rate portion works independently from the open-or-closed portion. A variable interest rate may increase or decrease during the term, while the mortgage contract separately determines your prepayment rights.
How an Open Variable Rate Mortgage Works
An open variable rate mortgage gives you two features at once. Your interest rate can move during the mortgage term, and you can make extra principal payments without a prepayment penalty. You can also repay the mortgage in full before maturity without that penalty.
The rate is commonly linked to a lender’s prime rate. For example, a lender might price a variable mortgage as prime plus or minus a specified percentage. When the underlying rate changes, your mortgage rate changes as well.
Greater repayment freedom usually comes at a price because open mortgages typically carry higher interest rates than comparable closed mortgages. That makes an open variable mortgage most relevant when unrestricted early repayment has real value to you, rather than simply being a feature that sounds useful.
How a Closed Variable Rate Mortgage Works
A closed variable rate mortgage keeps the changing-rate feature but restricts early repayment. You may still be able to put extra money against the principal through the prepayment privileges written into your contract.
Those privileges can permit lump-sum payments or increases to regular payments up to specified limits. They vary between lenders, and exceeding them can result in a charge. The broader open versus closed mortgage comparison applies regardless of whether the interest rate itself is fixed or variable.
Closed mortgages typically offer lower rates than open mortgages with similar terms. For someone who expects to remain with the mortgage for the term, that trade can be worthwhile when the included prepayment privileges already cover any additional payments they expect to make.
Your Variable Rate Can Affect Your Payments Differently
“Variable rate” does not guarantee that every lender handles your regular payment the same way.
With a fixed-payment variable rate mortgage, your scheduled payment can remain unchanged when the interest rate moves. If rates rise, a larger share goes toward interest and less goes toward principal. If the rate reaches the mortgage’s trigger point, the lender may need to increase the payment to keep the mortgage on track.
An adjustable-payment variable rate mortgage works differently. The payment changes when the interest rate changes, while a set amount of each payment continues to go toward principal.
That payment structure is separate from whether the mortgage is open or closed. When comparing variable mortgage rates in Canada, check both features instead of assuming all variable mortgages respond to rate changes identically.
What Happens If You Want to Leave Before the Term Ends?
An open variable mortgage lets you break the contract without a prepayment penalty. A closed variable mortgage normally does not.
That difference can become important when you sell your home, refinance, transfer the mortgage to another lender or simply decide to repay the balance before maturity. These are circumstances in which a closed mortgage may generate a prepayment charge.
Prepayment penalties can cost thousands of dollars, and lenders do not all calculate them in the same way. Federally regulated financial institutions must disclose how their prepayment penalties work and provide information about the factors used in the calculation.
Someone who already expects an early exit has more reason to examine the added flexibility of an open mortgage. Someone without that expectation should weigh the cost of obtaining flexibility that may never be used.
Which Features Should You Compare?
Start with the variable rate itself, but do not stop there. Check whether regular payments are fixed or adjustable, how the rate is determined and what happens if rates rise substantially. Then examine the repayment side of the contract.
For a closed mortgage, the prepayment privileges and penalties deserve particular attention. A generous lump-sum allowance could provide enough flexibility for your plans without requiring an open mortgage.
The mortgage term matters as well because it determines how long the contract’s conditions remain in force. Canadian mortgage terms can range from a few months to five years or longer. The available open mortgage terms may therefore affect how long you need the additional repayment freedom.
Our preference would be to separate the decision into two questions. First, decide whether you are comfortable with an interest rate that can change. Then decide how likely you are to need unrestricted repayment before maturity. Combining those answers makes the open-versus-closed choice much clearer without treating every variable mortgage as the same product.
Other Questions About Open and Closed Variable Mortgages
Can both open and closed mortgages have variable rates?
Yes. Open or closed describes the mortgage’s prepayment restrictions, while variable describes an interest rate that may change during the term.
Can you convert a variable mortgage to a fixed rate?
Some lenders provide a conversion feature that lets you move from a variable to a fixed interest rate during the term. Fees or other conditions may apply, and the fixed rate offered at conversion may be higher than the variable rate you were paying.
Does a closed variable mortgage prevent you from making lump-sum payments?
Not necessarily. A closed mortgage may include a prepayment privilege that permits lump-sum payments up to the limits specified in the contract.
