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
A closed mortgage can be considered as a good option if:
- An individual plans to live in the home for the length of the mortgage term
- No expectation by the individual in getting any extra money to make additional payments
- An individual likes consistency for budgeting
- An individual is not comfortable with a potentially fluctuating interest rate.
Main advantage of a closed mortgage is usually the lower interest rate. If one feels that the interest rate offered is good, a closed mortgage would give stability knowing the rate would not increase for the duration of the term. Closed mortgage is also a good choice if an individual plans to have a mortgage for the long term. Savings made on lower interest rate would help an individual to pay off the mortgage faster.
Major disadvantage of a closed mortgage is the lack of flexibility. If an individual wants to change the mortgage agreement to take advantage of lower interest rate, then the individual would have to pay a fee.