Definition
A closed mortgage cannot be repaid in full before the term ends without a penalty. In exchange, it offers more favourable rates than an open mortgage — which is why the vast majority of borrowers choose this type.
The penalty for breaking a closed mortgage is calculated as the greater of: three months' interest or the Interest Rate Differential (IRD). For SCHL-insured loans, the IRD method is regulated and generally less costly. For conventional bank loans, the IRD can amount to tens of thousands of dollars.
Most closed mortgages include annual prepayment privileges (often 10% to 20% of the original principal), allowing capital reduction without triggering the full penalty.