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With a closed mortgage, you are “locked in” for a specific amount of time (e.g., three, five, seven, or ten years). This is known as your term. You commit to the lender for a pre-defined period of time. It has the benefit of allowing you to feel comfortable knowing that your mortgage interest rate will not change during the locked-in term — meaning your monthly mortgage payments will stay the same during this time period. This helps for budgeting and cash-flow purposes.

However, with a closed mortgage, unless you have a prepayment privilege included with your mortgage agreement, you may not have the option to prepay more than the predetermined amount of the principal balance before the expiration of the term without paying a penalty. If you decide to sell your home prior to the expiry of the term, this may cost you a considerable amount of money in penalties. It is imperative that you find out, negotiate, and understand your prepayment and discharge options in advance with the lender to minimize costly penalties in the future.

Normally, a lower interest rate is associated with a closed mortgage, and it is possible to obtain prepayment privileges and early discharge terms (often limited to three months’ interest penalty) with a closed mortgage. Make sure that you understand in advance what your terms and conditions will be with a closed mortgage. It is very important to know if a prepayment penalty exists (it usually does) and the amount the penalty will be before you agree to the mortgage; otherwise, this could be a very costly surprise. Ask and get the answer in writing! Consult with your lawyer prior to committing to any mortgage.