Ultimate Guide to Closed Mortgages

What is a “Closed Mortgage”?

A closed mortgage, like all mortgages, is little more than a structured plan to finance a home or property. Essentially a set of rules the lender puts forth that you will need to agree to and follow in order for them to lend you the money. Each type of mortgage comes with its own specific set of rules and for “Closed Mortgages”, you can expect to see the following.

1. Prepayment Limitations: Closed mortgages have limits on how much you are allowed to pay off of the loan, per calendar year, without penalty. You will still have the option to make larger payments on your loan, however, once you supersede the amount set forth your additional payment is often subject to additional interest rates and fees since you will be operating outside the rules of your Closed Mortgage.
2. Lower interest rates: Closed mortgages are going to have lower interest rates then their counterparts (Open Mortgages) due to the prepayment limitations mentioned above.
3. Term length:
   • Range: 6 Months to 10 Years.
   • Most common: 1 - 5 years.
4. Variable or Fixed Rates: Lastly You will have the option to choose between a fixed or variable rate interest option.
   • Fixed rate interest is exactly how it sounds: your interest rate is fixed at a set point for the duration of your loan.
   • Variable rate interest is slightly more complicated as your interest rate will be tethered to the Bank of Canada's prime interest rate which can fluctuate substantially.

Another way to put it, lending institutions will offer you a better interest rate provided you agree NOT to pay off your loan too quickly. Should you choose to pay down your loan faster, that's not a problem either because they will recoup their losses through prepayment penalties.

Comparison of Closed and Open Mortgage Options

Feature	Closed Mortgages	Open Mortgages
Flexibility for Early Repayment	Typically restricts the ability to make additional payments beyond set limits, imposing penalties for early repayment. Suitable for those with stable, predictable finances who do not plan to pay off the mortgage early.	Offers the flexibility to pay off the mortgage partially or in full at any time without penalties. Ideal for those expecting to make large lump-sum payments.
Interest Rates	Usually features lower interest rates as a trade-off for less repayment flexibility.	Generally has higher interest rates due to the flexibility they offer in terms of repayment.
Term Length	Available in a variety of term lengths, with longer terms locking in rates.	Often chosen for shorter terms due to their higher interest rates and flexibility.
Financial Planning	More suited to those with a long-term financial plan that do not anticipate significant changes in their ability to repay the mortgage.	Best for individuals who anticipate financial changes that may allow for early mortgage repayment or who value flexibility over interest rate savings.
Market Suitability	Favorable for those planning to stay in their home for the long term and who benefit from lower interest rates.	Beneficial in BC’s fluctuating market for homeowners who may wish to sell their property or pay off their mortgage quickly due to changing financial circumstances.

Advantages and Disadvantages of Closed Mortgages

Close mortgages are popular for their predictability, however, as with most things, there are always advantages and disadvantages as outlined below:

The Advantages

Lower Interest Rates

Closed mortgages typically offer lower interest rates compared to open mortgages. This can result in significant savings over the life of the mortgage.

Rate Stability

For fixed-rate closed mortgages, the interest rate is locked in for the duration of the term, which can provide stability and ease in budgeting, especially in a rising rate environment.

Longer Terms Available

Closed mortgages are available in a variety of term lengths, often extending up to 10 years, allowing for longer periods of financial planning without worrying about changes in terms or conditions.

The Disadvantages

Prepayment Limitations

Closed mortgages limit the amount you can prepay on your mortgage annually. Exceeding these limits can incur penalties, which can be costly. This makes it less ideal for those who might come into extra funds they wish to apply to their mortgage.

Less Flexibility

The terms of a closed mortgage are fixed, which means less flexibility to refinance or renegotiate the terms of the mortgage before the end of the term without facing a penalty.

Penalties for Breaking the Mortgage

If you need to break your mortgage agreement—due to selling your home, refinancing at a lower rate, or paying off the mortgage early—the financial penalties can be significant, often calculated as the greater of three months' interest or an interest rate differential (IRD).

Eligibility Criteria for a Closed Mortgage

Income Amount

The amount of your income is extremely important when applying for a mortgage. Lenders prioritize a borrower's ability to make consistent payments, which is largely determined by their income level. They often require proof of steady, reliable income to ensure that the borrower can sustain mortgage payments over time.

Income Stability

Along with the amount, the stability of your income is vital. Lenders need to see a stable and reliable income to be confident in the borrower’s ability to handle long-term payments. This typically involves providing proof of employment or a consistent income history.

Income Verification

Lenders are going to require proof to illustrate the above mentioned income amount & stability to ensure the borrowers can meet the required criteria. This process involves submitting documents such as pay stubs, tax returns, and employment letters.

For self-employed individuals, additional documentation such as profit and loss statements or business bank statements may be necessary to demonstrate income stability.

Debt-to-Income Ratio

This ratio measures the percentage of your income that goes towards paying debts. A lower debt-to-income ratio is preferable, as it indicates to lenders that you have enough income to cover additional mortgage payments.

Down Payment

The minimum down payment for a closed mortgage usually ranges from 5% to 20% of the property’s purchase price. This depends on the total value of the home. A larger down payment may be necessary if your credit score is below the preferred level.

For more details on what's needed to apply for your mortgage, visit my section on Required Documentation.

The Application Process for a Closed Mortgage

What Can You Afford (Pre-qualification)

The lending institution is going to evaluate your financial situation to determine what you can comfortably afford without financial strain. An estimate of your buying power that includes stress testing to ensure you can handle potential financial changes should they arise.

How much they can lend you (Mortgage Pre-approval)

The lender is going to take a closer look at your financial history and credit score to determine exactly how much they are able to lend you. This process not only specifies the loan amount you are eligible for but also may outline the interest rates you might face. Learn more about this on our Pre-Approved Mortgage Application page.

These are crucial steps in establishing a clear budget, ensuring you focus on homes that are financially feasible.

The Formal Application

Once you’re pre-approved, the next step is to submit a formal mortgage application. This is going to involve providing detailed information about the property you intend to purchase as well as your personal and financial information. Find out more about the application process on our New Mortgage Application page.

Assessment and Approval

After submitting your formal application, the lender is going to assess all the details, including a thorough appraisal of the property, and possibly additional financial checks to confirm your eligibility.

After everything meets their criteria, your mortgage application will be approved, moving you one step closer to securing your new home.

Closing the Deal

In this final step, you'll sign the mortgage documents and take care of the legal details, like transferring the property title and registering the deed. A lawyer will handle these aspects to make sure everything is done correctly. Once all the paperwork is in order and approved, the funds are released, and you can officially complete the purchase of your home.

Know Your Rights!

Navigating mortgages can be tricky, and BC has its own specific rules. Understanding these laws and regulations will help you make smart decisions and protect yourself throughout the process.

What You Need to Know:

1. BC Mortgage Laws
   These rules cover how lenders operate, what they have to tell you, and your rights within a mortgage agreement (like being able to back out within a certain time).
2. Mortgage Insurance
   If you're putting down less than 20%, you'll likely need mortgage insurance. BC works with the Canada Mortgage and Housing Corporation (CMHC) and other providers for this.
3. Your Rights
   You have the right to clear explanations about your mortgage, a fair application process, and more! This includes understanding the stability and fixed interest rates that closed mortgages provide.
4. Your Responsibilities
   This includes being honest about your finances and making those payments on time. With closed mortgages, it is important to understand the penalties for breaking the mortgage early.

How a Mortgage Specialist Can Help!

Navigating mortgages alone can feel overwhelming, especially with BC's specific regulations. A mortgage specialist acts as your expert guide, empowering you to make smart choices:

What you need to know:

1. Personalized Advice
   Every financial situation is different. A mortgage specialist takes the time to understand your goals, income, and credit – then helps you find mortgage options that truly make sense for you, including stable closed mortgages.
2. Explaining Your Options
   Mortgage terms and jargon can be confusing. A specialist breaks everything down into plain language, so you fully understand your choices.
3. Informed Decisions
   With a clear picture of the pros and cons of different mortgage products, including the predictability and fixed interest rates of closed mortgages, you can make decisions that align with your financial needs and long-term plans.
4. Avoiding Costly Mistakes
   From hidden fees to unfavorable terms, a mortgage specialist helps you sidestep pitfalls that could cost you money down the road. This includes understanding the penalties associated with breaking a closed mortgage early.
5. Your Advocate and Insider
   Mortgage specialists understand the industry and BC's regulations. They work on your behalf, negotiating with lenders and ensuring you get the best possible deal.

Think of a mortgage specialist as your personal mortgage compass, helping you make the right financial move for your future!