A mortgage with restrictions on how much extra you can pay toward the principal during the term. Closed mortgages typically allow annual prepayment privileges (10% to 20% of the original principal), but paying more than the allowed amount or breaking the mortgage early triggers a penalty. In exchange for this restriction, closed mortgages offer lower interest rates than open mortgages.
Why It Matters
The vast majority of Canadian mortgages are closed because they offer better rates. The prepayment privileges built into most closed mortgages give you enough flexibility to make extra payments without penalty. Understand your prepayment limits and penalty structure before signing -- especially if life changes might require you to break the mortgage.
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