A closed mortgage is a type of mortgage term that limits borrowers’ payment flexibility, and the amount of the principal loan amount that can be paid without penalty. Generally, most lenders will allow borrowers to pay a lump sum of up to 20% of their original mortgage balance each year and a 20% increase of their monthly payment.
With a closed, fixed-rate mortgage, the prepayment penalties are calculated differently from closed variable-rate mortgages.
Penalty for closed fixed interest rate mortgages
If you have a fixed-rate mortgage with a closed term and are paying off your mortgage, the prepayment penalty will be the greater of interest rate differential (IRD) or 3 (three) months interest. Interest rate differential is a calculation some lenders use to calculate the discount of your interest rate from the prime rate.
Penalty for closed variable interest rate mortgages
Variable mortgage rates usually have a 3 (three) month interest penalty. There are some variable-rate mortgages, such as the low rate basic mortgage product offered by some lenders, which will have a 3% penalty, if the mortgage is paid off early.
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