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A closed mortgage restricts how much of the balance can be prepaid before the term ends — beyond the lender’s prepayment privileges, paying it off early typically triggers a prepayment penalty — in exchange for a lower rate than an open mortgage.
Most mortgages in Canada are closed. Lenders allow a set amount of extra prepayment each year through prepayment privileges, but paying beyond that — or discharging the mortgage entirely before the term matures — usually means paying a prepayment penalty, calculated as either three months’ interest or the interest rate differential, whichever the lender’s formula produces for a fixed-rate mortgage.
The right to prepay isn’t unlimited even with a penalty, either: section 10 of the Interest Act caps the maximum penalty at three months’ interest for an individual borrower once five years of a longer term have elapsed, regardless of the rate originally locked in.
The default structure: closed terms are the norm in the Canadian market, offered across every term length from one to ten years.
Interest Act protection after five years: under section 10 of the Interest Act, an individual borrower can prepay a closed mortgage after five years have passed with a penalty capped at three months’ interest, even on a longer original term.
Variable vs. fixed penalties differ: closed variable-rate mortgages are typically charged three months’ interest to break early, while closed fixed-rate mortgages use whichever is greater of three months’ interest or the interest rate differential.
Prepayment privileges soften the restriction: most closed mortgages still allow annual lump-sum and payment-increase privileges set by the lender, on top of regular scheduled payments.
Definitions reflect Canadian federal and provincial rules as of the “Updated” date above. Not advice for any specific file.
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