Closed Mortgage

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Definition

Closed mortgage (also known as ‘Closed-End Mortgage’) is the type of mortgage which doesn’t provide the flexibility of making prepayments without incurring a penalty. Once the agreement is made, one cannot renegotiate or refinance the mortgage for that term. Even though it is a restrictive type of mortgage, yet it is the most common type of mortgage in Canada. In closed mortgage, if an individual pays off the mortgage before the end of the mortgage term then the individual will have to pay a penalty.

Pre-payment options in a closed mortgage are:

•  Pay up to 20% of the original mortgage annually
•  Double your payment option
•  Increase your monthly payments up to 20%.

The terms in a closed mortgage are longer, varying between 6 months to 10 years. However, closed mortgage has the lowest interest rate as compared to open mortgage: thereby attracting more of the average home buyers. Payment frequency in a closed mortgage is usually – Weekly, Bi-Weekly, Monthly and Semi-Monthly.

Explore Definition

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LAYMEN TERMS

You decide to buy an object XYZ, you don't have enough money so you take up the closed mortgage to buy the object. You bought the object and start paying back the loan money that is the mortgage timely. Suddenly, you own a lottery and get a huge amount of money! Since, now that you have the required money to buy XYZ, you decided to pay the back the loan by giving this money to the lender. So, you break the contract and therefore now you have to penalty that is - extra money as punishment as you are not allowed to pay the full amount in advance in a closed mortgage.

HOW DOES THIS TERM APPLY TO YOU

An individual with a steady and limited income usually chooses a closed mortgage knowing that there's no chance for a sudden flow of money in the near future. The individual takes up the closed mortgage to buy a house, planning to live in that house for a longer time right along the length of the mortgage term. Even if the individual, at certain point of time, feels to pay off the mortgage amount before the end of its term, he would hesitate to do so because if he does then he will have to pay penalty fee. Therefore, an individual with consistency in savings would not take the step of early payment in a closed mortgage to disrupt his budget.

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