Closed Mortgage
Hypothèque fermée in French
Quick definition
A closed mortgage limits extra payments to the privileges written into your contract and charges a penalty if you break the term early. In exchange, the rate is significantly lower than an open mortgage, which is why the vast majority of Canadian mortgages are closed.
"Closed" does not mean locked shut
The name misleads people. A closed mortgage is not closed to all extra payments; it is closed to unlimited extra payments. Nearly every closed mortgage comes with a prepayment privilege that typically lets you prepay 10% to 20% of the original balance each year, increase your regular payment, or both, all penalty-free. For most households, that is far more prepayment room than they will ever use.
The contrast is the open mortgage, which allows unlimited prepayment at any time but charges a much higher rate for the privilege. Closed is the default; open is the exception you pay for.
The real cost: breaking early
Where "closed" bites is ending the term before maturity, to sell, refinance, or chase a better rate. That triggers a prepayment penalty: typically three months' interest on a closed variable, and the greater of three months' interest or the interest rate differential (IRD) on a closed fixed, a formula that can reach five figures when rates have fallen since you signed.
Note that "closed" describes the prepayment rules, not the rate type. Fixed and variable mortgages can both be closed, and most of each are.
When the trade-off is right
Almost always. A rate discount of even half a point on a typical balance is worth thousands per term, real money paid for flexibility most borrowers never use. The privileges absorb normal life: windfalls, raises, aggressive prepayment plans.
The exception is a known early exit: if you are confident you will sell or fully pay off the mortgage within the term and cannot port it, price the penalty first. In that narrow case a shorter term or an open mortgage can be the cheaper path.
In Canada
The 5-year closed fixed is Canada's flagship mortgage product, and closed terms dominate lending across banks, credit unions, and monoline lenders. One Canadian wrinkle worth knowing: big banks usually calculate IRD penalties from their posted rates, which inflates the penalty compared with the discounted-rate method many monoline lenders use. Two identical closed mortgages can carry very different exit costs.
Worked example
Dana borrows $400,000 and chooses a 5-year closed fixed at 4.5% instead of an open mortgage at 7% (as of July 2026). The closed rate saves her roughly $10,000 a year in interest. In year two she inherits $20,000 and prepays it penalty-free under her 15% annual privilege. In year four she unexpectedly sells and pays a penalty of about $4,100. Even after the penalty, the closed mortgage left her tens of thousands ahead of the open alternative.
Related terms
Reviewed by Alexandre Bernier, CFP®, CIM®, PFP®·Updated July 2026