Definition: A closed mortgage is a mortgage agreement that restricts the borrower’s ability to make additional payments or pay off the loan before the end of the term without incurring penalties. Closed mortgages typically offer lower interest rates than open mortgages due to these restrictions.

Features of a closed mortgage

• Prepayment limitations: Borrowers are often restricted in how much extra they can pay toward the principal balance annually, typically capped at 10-20%.
• Early payment penalties: Paying off the mortgage early or refinancing can trigger significant penalties, often based on the lender’s interest rate differential (IRD) or a set number of months’ interest.

Benefits and considerations

A closed mortgage can be advantageous for those looking for lower rates and who plan to hold the mortgage for the full term without large prepayments. However, borrowers who expect to sell or refinance in the near future might prefer an open mortgage to avoid potential penalties.

Last modified: November 5, 2024