The Pros and Cons of Closed Mortgages and Is it the Right Choice for You

What is a Closed Mortgage?

A closed mortgage is one that is not allowed to be prepaid, renegotiated, or refinanced before the term ends without incurring a prepayment charge.

closed mortgagesIn Canada, a closed mortgage refers to a type of mortgage loan that comes with certain restrictions and limitations on prepayment, renegotiation, and refinancing. It is important to note that mortgage terms and conditions can vary among lenders, so it’s always advisable to review specific terms with your chosen financial institution.

Here are some key features of a closed mortgage in Canada:

  1. Prepayment Restrictions: Closed mortgages typically have limitations on prepayment options. This means that during the closed term (which is usually 1 to 10 years), you are not allowed to fully pay off your mortgage or make substantial prepayments without incurring a penalty. However, most closed mortgages do offer prepayment privileges that allow you to make extra payments up to a certain percentage of the original principal amount each year, typically ranging from 10% to 20%. These prepayment privileges help you reduce your mortgage balance faster and save on interest costs.
  2. Renegotiation and Refinancing Restrictions: Closed mortgages have restrictions on renegotiating the interest rate or other terms before the term expires. If you wish to renegotiate the mortgage before the term ends, you will face penalties or fees. Additionally, refinancing to access the equity in your home or switching lenders during the closed term will also involve penalties.
  3. Lower Interest Rates: Closed mortgages often offer lower interest rates compared to open mortgages, where you have more flexibility but at the cost of higher interest rates. The benefit of a closed mortgage is that the lender can offer you a lower rate because they have more assurance that they will receive interest income for the specified term.
  4. Term Length: Closed mortgages come with fixed terms ranging from 1 to 10 years, although the most common terms are 3, 4, and 5 years. During the term, you have a set interest rate and payment schedule.
  5. Payment Frequency: You can choose the payment frequency that suits your needs, such as monthly, bi-weekly, or accelerated bi-weekly payments. Accelerated payment options can help you pay off your mortgage faster.

It’s crucial to carefully consider your financial goals and circumstances before selecting a closed mortgage. If you anticipate the need for greater flexibility or expect to make significant prepayments, an open mortgage or a mortgage with more flexible terms may be more suitable, even if it means accepting a slightly higher interest rate. Consulting with a mortgage professional or financial advisor can help you make an informed decision based on your specific situation.

When is Refinancing a Closed Mortgage Beneficial?

Refinancing a closed mortgage can be beneficial in several situations:
  1. Lower Interest Rates: If interest rates have significantly decreased since you obtained your closed mortgage, refinancing allows you to secure a new mortgage with a lower interest rate. This can potentially result in reduced monthly payments and long-term interest savings.
  2. Accessing Home Equity: If your property’s value has increased or you’ve built up substantial equity, refinancing a closed mortgage enables you to access that equity as cash. You can use this money for home renovations, debt consolidation, investments, or other financial needs.
  3. Changing Mortgage Terms: Refinancing allows you to modify your mortgage terms to better suit your financial goals. For example, you may want to switch from a longer-term mortgage to a shorter-term mortgage to pay off your loan faster. Alternatively, you may prefer to extend the term for lower monthly payments.
  4. Consolidating Debts: If you have high-interest debts, such as credit card debt or personal loans, refinancing a closed mortgage can enable you to consolidate those debts into your mortgage. By doing so, you can take advantage of the lower mortgage interest rate, potentially reducing your overall interest costs and simplifying your monthly payments.
  5. Removing a Co-Borrower: If your current closed mortgage has a co-borrower and you wish to remove them from the mortgage, refinancing allows you to do so. This can be beneficial in situations such as a divorce or when you want to take sole responsibility for the mortgage.
  6. Changing Lenders: Refinancing offers an opportunity to switch lenders if you are dissatisfied with your current lender’s service or if another lender offers more favourable terms. By exploring different lenders and their mortgage offerings, you may find better interest rates, lower fees, or improved customer service.

Remember, refinancing a closed mortgage involves various factors to consider, such as prepayment penalties, closing costs, and the overall impact on your financial situation. It’s crucial to evaluate the potential benefits against the associated costs and carefully assess whether refinancing aligns with your long-term financial goals. Consulting with a mortgage professional or financial advisor can help you determine if refinancing a closed mortgage is beneficial in your specific circumstances.

How can you refinance a closed mortgage?

Refinancing a closed mortgage in Canada typically involves breaking your existing mortgage contract before the term expires and replacing it with a new mortgage agreement. However, it’s important to note that refinancing a closed mortgage before the term ends may come with penalties or fees, which can vary depending on your lender and the specific terms of your mortgage agreement.

Here are the general steps involved in refinancing a closed mortgage:

  1. Assess your financial situation: Determine your reasons for refinancing. Common reasons include obtaining a lower interest rate, accessing home equity for renovations or debt consolidation, or changing mortgage terms to better align with your financial goals.
  2. Review your existing mortgage agreement: Take a close look at the terms and conditions of your current mortgage contract. Look for any penalties or fees associated with breaking the mortgage before the term ends. It’s important to calculate if the potential savings from refinancing outweigh the costs.
  3. Shop for a new mortgage: Research different lenders and mortgage products to find the best option for your refinancing needs. Consider factors such as interest rates, terms, fees, and prepayment privileges. You may want to consult with multiple lenders or work with a mortgage broker to explore your options.
  4. Apply for the new mortgage: Once you’ve chosen a lender and a suitable mortgage product, you’ll need to submit an application. The lender will assess your eligibility based on factors such as credit history, income, and property value.
  5. Conduct a mortgage appraisal: As part of the refinancing process, the lender may require a professional appraisal to determine the current value of your property. This valuation helps the lender assess the loan-to-value ratio and ensure the property meets its lending criteria.
  6. Consider the costs: Keep in mind that refinancing a closed mortgage may involve various costs, such as appraisal fees, legal fees, and potential mortgage discharge fees from your existing lender. It’s essential to factor in these costs when evaluating the financial benefits of refinancing.
  7. Evaluate the new mortgage terms: Carefully review the terms and conditions of the new mortgage offer, including the interest rate, payment schedule, and any prepayment privileges or restrictions. Ensure that the new mortgage aligns with your financial goals.
  8. Make a decision: Based on your evaluation of the costs, potential savings, and overall suitability of the new mortgage, you can decide whether to proceed with the refinancing. Consider consulting with a mortgage professional or financial advisor to assist you in making an informed decision.

Remember that the specific process and requirements for refinancing a closed mortgage can vary among lenders. It’s recommended to reach out to your current lender or a mortgage professional for guidance and to ensure you fully understand the implications of refinancing your closed mortgage.

Can a Mortgage Broker help refinance a Closed Mortgage?

When it comes to refinancing a closed mortgage, a mortgage broker can provide valuable assistance throughout the process. Here are some specific ways in which a mortgage broker can help with refinancing:

  1. Assessing Your Refinancing Goals: A mortgage broker will start by understanding your reasons for refinancing. Whether you want to secure a lower interest rate, access home equity for renovations or debt consolidation, or change mortgage terms, they will evaluate your goals and financial situation to provide suitable refinancing options.
  2. Exploring Mortgage Options: Mortgage brokers have access to a wide range of lenders and mortgage products. They will leverage their network to present you with various refinancing options from different lenders. This allows you to compare interest rates, terms, and conditions to find the most favourable solution.
  3. Finding the Best Interest Rates: Mortgage brokers stay updated on current mortgage rates and market trends. They can leverage their knowledge and industry connections to identify lenders offering competitive interest rates for your refinancing needs. This helps ensure you secure a refinanced mortgage with favourable terms and potentially lower monthly payments.
  4. Handling Paperwork and Documentation: Refinancing a mortgage involves significant paperwork, including completing applications, gathering financial documents, and submitting them to the lender. A mortgage broker can handle these tasks on your behalf, ensuring that all necessary paperwork is completed accurately and submitted within the required timelines.
  5. Negotiating with Lenders: Mortgage brokers have experience and expertise in negotiating with lenders. They can advocate on your behalf to secure the most favourable terms for your refinanced mortgage. This may include negotiating lower interest rates, reduced fees, or more flexible terms based on your financial situation and objectives.
  6. Guiding You Through the Process: Refinancing a mortgage can be complex, and there may be specific requirements or considerations based on your current mortgage agreement. A mortgage broker can guide you through the entire process, explaining each step, addressing any questions or concerns you may have, and ensuring you have a clear understanding of the refinancing process.
  7. Considering Penalties and Costs: Refinancing a closed mortgage before the term expires may involve penalties or fees. A mortgage broker can help you evaluate the potential costs associated with breaking your existing mortgage and refinancing. They can help you assess whether the potential savings from refinancing outweigh the expenses involved.
  8. Supporting After Refinancing: Even after completing the refinancing process, a mortgage broker can continue to provide support. They can assist with any questions or concerns related to your new mortgage, help you navigate mortgage renewal periods, and provide advice on future refinancing opportunities if needed.

Remember, the specific assistance provided by a mortgage broker during the refinancing process may vary based on your unique circumstances and the services offered by the broker. It’s advisable to have a detailed discussion with a mortgage broker to understand how they can specifically support your refinancing goals and requirements.

If you need help with your Closed Mortgage call 416-912-6200 and speak to someone about a solution today!