Understanding Fixed Rate Closed Mortgages

When you buy a home in Canada, you have several mortgage options available. A closed mortgage is a type of mortgage that offers borrowers a fixed interest rate and payment schedule for a predetermined period. In this article, we will explore the pros and cons of closed mortgages in Canada, so you can make an informed decision about your mortgage. Closed mortgages can also have a variable interest rate, but below we will focus on closed mortgages with a fixed interest rate.

What is a Closed Mortgage?

A closed mortgage is a mortgage in which the borrower agrees to a set term and interest rate with the lender. This type of mortgage has a predetermined length of time, usually ranging from six months to 10 years. During this period, the borrower is not allowed to pay off the mortgage, renegotiate the interest rate, or make any changes to the terms without incurring a penalty.

Pros of Closed Mortgages:

  1. Lower Interest Rates: Closed mortgages generally offer lower interest rates than open mortgages, as lenders are willing to offer lower rates in exchange for the security of knowing the borrower cannot pay off the mortgage early. This is not always the case so please consult a mortgage professional to clarify current market rates.
  2. Predictable Payments: Closed mortgages offer predictable payments, as borrowers know exactly how much they need to pay each month. This makes budgeting easier, and borrowers can plan their finances accordingly.
  3. Protection from Interest Rate Increases: Since the interest rate is fixed, borrowers are protected from sudden increases in interest rates that could result in higher monthly payments.
  4. Option for Pre-Payment: Many closed mortgages allow for pre-payment of a certain amount each year, which can help borrowers reduce the overall amount of interest paid and pay off the mortgage sooner.

Cons of Closed Mortgages:

  1. Limited Flexibility: Closed mortgages offer limited flexibility, as borrowers are not allowed to make any changes to the terms of the mortgage without incurring a penalty.
  2. Penalties for Early Repayment: If a borrower wants to pay off a closed mortgage before the end of the term, they will typically face a penalty. This penalty can be quite substantial and can make paying off the mortgage early unaffordable.
  3. Higher Rates for Shorter Terms: The interest rates for closed mortgages with shorter terms can sometimes be higher than those for open mortgages. This can be a disadvantage for borrowers who prefer shorter terms but want to pay lower interest rates.

Closed mortgages offer borrowers predictable payments and protection from sudden interest rate increases. They can also be an excellent option for those who want to pay off their mortgage sooner through pre-payment options. However, closed mortgages come with limitations and penalties for early repayment, making them less flexible than open mortgages. Ultimately, it’s important to weigh the pros and cons of closed mortgages carefully and choose the mortgage that works best for your financial situation.

A closed mortgage is best suited for borrowers who want predictable payments and protection from interest rate increases for a set period. This type of mortgage is ideal for individuals who have a stable income and want to budget their finances accordingly without worrying about fluctuations in interest rates. Closed mortgages are also suitable for borrowers who do not anticipate needing to make any changes to their mortgage terms, such as refinancing or selling their home, during the term of the mortgage.

Closed mortgages are particularly well-suited for first-time homebuyers who may be more risk-averse and want the security of knowing how much their monthly mortgage payment will be. It can also be a good option for individuals who are planning to pay off their mortgage over a longer period and want to take advantage of the lower interest rates that are typically associated with closed mortgages.

However, closed mortgages may not be the best option for borrowers who require more flexibility in their mortgage terms, such as those who anticipate needing to move or refinance their mortgage before the end of the term. If a borrower needs to make changes to their mortgage terms or wants to pay off their mortgage early, they will typically face penalties with a closed mortgage. It’s essential to consider your financial goals and needs carefully when choosing a mortgage type to ensure that you select the best option for your specific situation.

A mortgage broker can definitely help you obtain a closed mortgage. Mortgage brokers are licensed professionals who work with multiple lenders to find the best mortgage options for their clients. They have access to a wide range of mortgage products, including closed mortgages, and can help you navigate the application process.

When you work with a mortgage broker, they will review your financial situation, including your credit score, income, and debt-to-income ratio, to determine what type of mortgage is best for you. If a closed mortgage is the right choice, the broker will help you find a lender who offers closed mortgages with terms and interest rates that meet your needs.

The broker will also help you complete the mortgage application, gather the necessary documentation, and submit the application to the lender. They will work with the lender to ensure that your mortgage is approved and funded, and they can answer any questions you may have throughout the process.

Working with a mortgage broker can be a valuable asset when obtaining a closed mortgage. They can save you time and money by shopping around for the best rates and terms, and they can guide you through the application process from start to finish. If you are considering a closed mortgage, it’s a good idea to consult with a mortgage broker to see if it’s the right option for you and to get assistance in finding the best deal.

For more information on closed mortgages call 416-912-6200