Mortgage Basics
Closed Mortgage Restrictions and What They Cost
Closed mortgage restrictions cap prepayments and trigger penalties if you break the term early. Here's what those limits cost Canadian homeowners today.
Closed mortgage restrictions are the terms your lender attaches to a closed mortgage: a cap on how much extra you can pay each year, limits on paying the loan off early, and a penalty if you break the contract before the term ends. In exchange, you get a lower interest rate than an open mortgage normally offers. The restrictions are not hidden — they sit in your mortgage contract — but their real cost only becomes clear when your life changes and you need to move, refinance, or pay the balance down faster.
What "closed" means in a Canadian mortgage
In Canada, a mortgage is either open or closed. An open mortgage lets you prepay or pay off the entire balance at any time without a penalty, and it usually carries a higher rate. A closed mortgage locks the terms for the length of the mortgage term, which is typically one to five years, in return for a lower rate. Most Canadians choose closed because the rate difference is meaningful over a term.
"Closed" does not mean you can never pay extra. It means extra payments are capped, and anything beyond the cap triggers a prepayment penalty. Your rights here are governed by the contract, and lenders must disclose prepayment terms and penalty calculations under federal consumer rules. See open vs closed mortgage for the full comparison.
The restrictions you will actually find in the contract
Every lender words its contract differently, so read yours. That said, closed mortgages in Canada usually restrict you in some combination of these ways.
| Restriction | What it typically means |
|---|---|
| Annual prepayment cap | Often a percentage of the original principal, such as 10% or 15%, that you can pay down each year without penalty. |
| Payment increase limits | A cap on how much you can raise your regular payment, frequently stated as a percentage. |
| Lump-sum limits | Rules on when and how often you can make extra lump-sum payments. |
| Early payout penalty | A charge for paying the balance in full or breaking the term before it matures. |
| Refinance and re-advance limits | Conditions on borrowing more, re-amortizing, or restructuring mid-term. |
| Portability and assumability | Whether you can move the mortgage to a new home or have a buyer take it over. |
Some closed mortgages are stricter than others. A "no frills" closed mortgage may allow little or no prepayment, while a full-featured closed mortgage may allow 15% or 20% annual prepayment plus a payment increase. The rate you are quoted often reflects how much flexibility you are giving up.
What breaking a closed mortgage can cost
This is where restrictions get expensive. If you break a closed mortgage before the term ends — because you sell, refinance, or switch lenders — the lender charges a prepayment penalty. The standard calculation is the greater of three months' interest or the interest rate differential (IRD). You can see how that math works in interest rate differential (IRD), explained.
The IRD compensates the lender for the interest it expected to earn. When your contract rate is higher than the rate the lender can now charge, the IRD can be large — potentially thousands of dollars on a sizeable balance. Three months' interest is usually the floor, and it is what most variable-rate closed mortgages charge. Penalties on fixed-rate closed mortgages can be considerably higher.
A few contract features soften the blow. Portability lets you move the mortgage to a new property, and some lenders waive the penalty entirely if you do. Others offer a blend-and-extend option at renewal. Neither is guaranteed, so confirm your lender's policy before you rely on it. For the full picture, see the penalty for breaking a mortgage early.
Restrictions that are not about penalties
Some closed mortgage restrictions have nothing to do with penalties but still limit your options.
- No mid-term switching without penalty. You generally cannot move to another lender until the term ends unless you pay to break.
- Limited refinancing. Borrowing more money usually means a refinance, which ends the term and triggers a penalty.
- Amortization is more flexible than the term. Your amortization may run 25 years, but the closed term resets at renewal. See mortgage term vs amortization.
- Rate type matters. A closed fixed rate and a closed variable rate carry different penalty formulas and different exposure to moves in the Bank of Canada policy rate and the prime rate.
How closed mortgage restrictions interact with qualification rules
Closing restrictions affect more than your exit costs. Under OSFI Guideline B-20, federally regulated lenders must apply the federal mortgage stress test, qualifying you at the higher of your contract rate plus two percentage points or the published qualifying-rate floor. Confirm the current floor with OSFI or your lender.
Income and debt ratios also matter. Lenders measure your gross debt service (GDS) and total debt service (TDS) ratios — see GDS and TDS ratios. If your down payment is below 20%, your mortgage must be insured, typically through CMHC mortgage default insurance. Because you also pay land transfer tax and closing costs, some buyers stretch their budget and plan to catch up using annual prepayment room — which is exactly what a restrictive closed mortgage limits.
If you are saving a down payment, the RRSP Home Buyers' Plan and the First Home Savings Account (FHSA) can help, though you should confirm current limits with the CRA.
Who a closed mortgage suits — and who it does not
A closed mortgage usually fits you if you expect to stay in the home past the term, want the lowest rate you can get, and are comfortable with a defined prepayment allowance. The lower rate can save real interest over time.
A closed mortgage is less suited to you if any of these apply:
- You may sell within the term.
- You expect a large windfall and want to pay the mortgage down aggressively.
- You plan to refinance to access equity or consolidate debt.
- You want the freedom to switch lenders on short notice.
In those cases, the flexibility of an open mortgage, a shorter closed term, or a more full-featured closed product may be worth the higher rate. Run the numbers before you decide.
How to reduce what the restrictions cost you
- Read the prepayment clause before you sign. Ask for the exact annual prepayment percentage, whether lump sums are separate from increased payments, and how the penalty is calculated.
- Negotiate the flexibility, not just the rate. A slightly higher rate with a 20% prepayment privilege can beat a rock-bottom rate with no prepayment room.
- Use your annual prepayment allowance every year. Even small lump sums reduce principal and cut interest over the amortization.
- Time your exit. If a sale or refinance is likely, plan it around renewal so you avoid the penalty altogether. See mortgage renewal in Canada.
- Compare total cost, not headline rate. The cheapest rate is not always the cheapest mortgage once restrictions are priced in.
None of this is personalised advice. Rates, penalty formulas, and prepayment privileges vary by lender and change over time, so confirm the current terms in writing with your lender or a licensed mortgage professional before you commit.
Frequently asked questions
What is a closed mortgage?
A closed mortgage fixes your terms for the length of the mortgage term and limits how much you can prepay or pay off early without a penalty. In return, the lender typically offers a lower interest rate than an open mortgage. Most Canadian homeowners choose closed mortgages for the rate advantage and accept the prepayment limits that come with it.
How much is the penalty for breaking a closed mortgage?
Lenders usually charge the greater of three months' interest or the interest rate differential (IRD). Three months' interest is often the floor, while the IRD can be much larger on a fixed-rate mortgage with a high balance and a long remaining term. Ask your lender for a written payout statement to see your exact number.
Can I pay off a closed mortgage early?
Generally not without a penalty. Closed mortgages cap annual prepayments, often at a percentage of the original principal, and paying the full balance before the term ends triggers a prepayment penalty. Some lenders allow portability so you can move the mortgage to a new home without penalty, but confirm that policy in writing first.
Are closed mortgages always better than open mortgages?
Not always. Closed mortgages usually offer lower rates but restrict prepayments and early exits. Open mortgages cost more but let you pay off the balance anytime without penalty. If you may sell, refinance, or pay down aggressively within the term, the flexibility of an open mortgage or a full-featured closed product may be worth the higher rate.