Open vs closed mortgages
An open mortgage lets you pay it off anytime with no penalty but costs a higher rate; a closed mortgage is cheaper but penalizes you for paying it off early.
A closed mortgage is the default in Canada, and it is closed because the lender limits how much of it you can pay off early. You can still make normal payments and usually some extra prepayment each year (most lenders allow lump sums and payment increases up to a set percentage of the original balance annually), but if you pay the whole thing off or break the contract before the term ends, you owe a prepayment penalty. The rate is lower precisely because you have handed the lender that certainty.
An open mortgage removes the handcuffs. You can pay off any amount, any time, including the full balance, with no penalty. You pay for that freedom with a higher interest rate, often noticeably higher. It is the same trade in reverse: you keep the flexibility, the lender loses the certainty, and the rate reflects it.
The penalty on a closed mortgage is where people get hurt, so know how it is calculated before you sign. On a closed variable-rate mortgage, breaking it usually costs three months' interest. On a closed fixed-rate mortgage, the penalty is the greater of three months' interest or the interest rate differential (IRD): the lender's estimate of the interest it loses because rates have dropped since you signed. IRD can run into the thousands or tens of thousands, and the arithmetic each lender uses is not standardized: a "posted-rate" IRD calculation at a big bank can produce a far larger penalty than a smaller lender's method, on the identical loan. Federal cost-of-borrowing rules require lenders to disclose how they calculate it, so ask for the formula and a sample figure in writing before committing.
An open mortgage makes sense when you know money is coming or leaving soon: you are selling within months, expecting a lump sum (an inheritance, a bonus, proceeds from another property), or bridging a short gap. If you are staying put and just paying it down normally, an open mortgage means paying a higher rate every month to insure against a flexibility you will not use, which for most buyers is a poor deal. The honest middle ground most people miss: a closed mortgage's built-in annual prepayment privileges already let you pay down a meaningful chunk penalty-free, so you rarely need "open" to pay aggressively. And a shorter closed term can beat an open mortgage if the real worry is being locked in too long.