Closed Mortgage

This is the least flexible of the mortgage types available in Canada. While the interest is usually lower, fixed, and locked in for the duration of the term, there are usually prepayment penalties attached to the package.

Some lenders do allow you to pay up to 10-25% of your original principle balance each year without penalty. This is something you should consider if you opt for a closed mortgage, yet wish to have the option to reduce your principle at least partially.

Closed mortgages come with terms of anywhere from six months to 20 years. Five years is the average. They are available in fixed rate and adjustable rate interest.

Some closed mortgages taper the stiffness of the pre-payment penalty off the farther into the term the borrower goes. This is because the lender has realized more of the anticipated interest earnings.

Benefits of a Fixed Closed Mortgage

Because the lender can calculate how much interest the mortgage will generate in income, the lowest interest rates are associated with closed mortgages. This means the borrower benefits from lower monthly payments. For those who don’t anticipate the disruption of selling their home before the term expires, this can translate into thousands of dollars in interest savings over the course of a loan.

Budgeting is easier with a fixed closed mortgage. The tradeoff for less flexibility is the ability to know exactly what monthly payments will be. When the economy is poised for a run of inflation, the combination of a closed mortgage and a fixed interest rate can be very comforting. In a period of deflation, a closed mortgage may be costly.

It usually takes a 2 to 3% drop in interest rates to compensate for the losses connected with the prepayment penalty. If possible, it is better to wait until the term expires and it’s time for renewal before changing mortgages.

Does a Closed Mortgages Make Sense For You?

If you are moving toward retirement, without the need to move, then a closed mortgage is a logical choice when it allows you to make some payments against your principle each year without triggering penalties. For example, if a closed mortgage allows up to 10-25% of the original balance to be paid down each year, it still remains possible to pay off the mortgage before you enter retirement.

If you are a younger first-time home buyer, a closed mortgage may be a good choice as well. For example, a couple who wants to build up equity in their first home before adding children to their family unit, can leverage the closed mortgage to build their credit, while saving money toward the larger home a family would require.