What a closed mortgage means in Canada and why the lower rate often comes with meaningful break-cost limits.
A closed mortgage is a mortgage that limits how much of the balance you can repay early without penalty. In Canada, it is the standard structure behind many everyday mortgage offers.
Closed mortgages often come with better rates than comparable open products, but the tradeoff is reduced flexibility. If the borrower breaks the mortgage early, sells the property, refinances mid-term, or pays more than the allowed prepayment privilege, the penalty can be significant.
Most Canadian closed mortgages still include some prepayment privilege, such as limited annual lump-sum rights or payment increases. That is why “closed” does not mean “no flexibility at all.” It means the flexibility is limited by contract.
Closed mortgages commonly appear with both fixed and variable rates. Penalty calculations can vary, and fixed-rate closed mortgages are often where borrowers hear about larger break-cost formulas.
You take a 5-year closed fixed mortgage because the rate is lower than the open alternative. Two years later, you decide to refinance to pull out equity. The refinance may trigger a penalty because you are ending the closed contract early.
Borrowers sometimes think closed means the mortgage cannot be prepaid at all. In reality, many contracts allow some annual lump sums or payment increases without penalty.
Another common mistake is ignoring the penalty clause because the borrower does not plan to move. Life events, job changes, separation, refinance needs, or a better renewal opportunity can still make break costs relevant.
Prepayment privileges, penalty formulas, and portability rights vary widely by lender and contract. Always compare the restriction structure, not only the interest rate.