Closed Mortgage

A closed mortgage is a mortgage that limits how much you can prepay and charges a penalty if you pay it off or break the contract before the term ends. In exchange for those restrictions, lenders typically offer a lower interest rate than on an open mortgage, which can generally be repaid at any time without penalty.

How a closed mortgage works

Most Canadian mortgages are closed. Over the mortgage term you make scheduled payments, and the lender sets a prepayment privilege — commonly an annual limit expressed as a percentage of the original principal, plus an option to increase regular payments by a set percentage. Amounts beyond those limits trigger a prepayment penalty.

Because the term is fixed and prepayment is capped, the lender can count on a predictable stream of interest. That predictability is a large part of why closed rates are usually lower than open rates, and why the contract is enforced if a borrower leaves early.

What it costs to break a closed mortgage

If you sell, refinance, or switch lenders before the term ends, the lender calculates a penalty, generally the greater of:

Three months' interest on the balance, or
the interest rate differential (IRD), which estimates the interest the lender loses when the mortgage is paid out early.

The IRD can be considerably larger than three months' interest, particularly on a longer term with a discounted rate. The exact formula is defined in your mortgage commitment, and lenders do not all calculate the comparison rate the same way.

Feature	Closed mortgage	Open mortgage
Prepayment	Limited to the stated privilege	Usually unlimited
Penalty to break	Three months' interest or IRD	Typically none
Typical rate	Lower	Higher

Why it matters to a borrower

Choosing closed or open is a trade-off between rate and flexibility. A borrower who expects to stay in the home for the whole term generally pays less interest with a closed mortgage. A borrower who may sell, refinance, or pay the balance down quickly may place more value on the flexibility of an open term.

A closed mortgage does not automatically become open at maturity. Once the term ends you can renew, switch, or pay the balance off without penalty — but only at that point. Compare the options in the open vs closed mortgage guide.

Frequently asked questions

What is the difference between an open and a closed mortgage?

A closed mortgage caps how much you can prepay and charges a penalty if you pay the balance off before the term ends. An open mortgage generally allows unlimited prepayment with little or no penalty, but its interest rate is usually higher. Many Canadian borrowers choose closed because the lower rate matters more to them than extra flexibility.

How much can I prepay on a closed mortgage each year?

The limit is set in your mortgage contract, not by law. Lenders commonly express it as a percentage of the original principal, along with an option to increase regular payments by a set percentage, and some permit lump sums only on payment dates. Check your mortgage commitment or ask your lender for the exact privilege before prepaying.

What happens if I break a closed mortgage early?

The lender charges a prepayment penalty, usually the greater of three months' interest or the interest rate differential. The IRD is often the larger figure, especially on longer terms with discounted rates. Selling the home, refinancing, or switching lenders mid-term all count as breaking the contract. Your mortgage documents state which calculation applies.