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A closed mortgage (also known as a ‘closed-end mortgage’) is a type of mortgage or home loan that must be paid back within the agreed-upon time and conditions negotiated during the mortgage agreement.

What is a closed mortgage?

When it comes to buying a home, most of us will need a mortgage. However, mortgages aren’t one-size-fits-all. You’ll need to shop around to find the best loan for your needs. A closed mortgage is one of the most restrictive types of mortgages — once you sign on the dotted line, you cannot renegotiate the terms, or refinance your home to use as home equity. A closed mortgage is a type of loan that must be paid back within the time and conditions set out during the loan closing.

How does a closed mortgage work?

Let’s say Zane and Alex take out a $200,000 closed mortgage that needs to be paid back with monthly payments over a 5-year term, with 4% interest. If they decide they want to pay off more than the monthly payments agreed upon, they’ll face a penalty. A closed mortgage will only allow you to pay 20% over and above your normal mortgage payment annually. Another potential issue with a closed mortgage is that you won’t be able to use the equity invested in the home (ie. the part of your home you actually own) as collateral for extra financing.

What is the difference between a closed and open mortgage?

If you can’t get a flexible loan, why pick a closed-end mortgage? Great question. It’s because closed mortgages (aka closed-variable rate mortgages) have significantly lower interest rates than open mortgages. As of November 2019, the mortgage market rates are as follows:

Five-year closed variable-rate = 3.10%

Five-year open variable-rate = 4.75%

So if you took out a $300,000 mortgage (paid off over 25 years) using the rates above, you’d be paying the following in interest: 

Five-year closed variable-rate = $9,075

Five-year open variable-rate = $13,895

So a closed-end mortgage will always come out cheaper than an open mortgage. 

An open variable mortgage is the direct opposite of a closed mortgage. An open mortgage means you get to be much more flexible in how much, and when, you want to pay off – You can choose to pay off your loan weekly, bi-weekly, semi-monthly or monthly. An open variable mortgage also means the interest you pay on your loan is flexible, so interest rates can fluctuate