Permissions to Pay Off Mortgage Faster

Different types of mortgages allow or prohibit the borrower to return money faster than it was initially scheduled, and fully prepay the mortgage.

Open Mortgage

You can repay it, in whole or in part (including refinancing), at any time during the term without penalty or notice. You may also choose, at any time, to renegotiate the mortgage. This option provides more flexibility but comes with a higher interest rate.

Open Mortgages are available only in short terms - 6 months or 1 year. They are designed for very specific circumstances and can be considered in one of the following situations:

  • You are planning to pay a significant amount towards your mortgage or if you just want to pay off completely and close in the near future - for example, if you know that you will get a large sum of money ("cash windfall" - such as from an inheritance or sale of another property) soon.

  • You know that you are going to sell the house in the next few months. Even though rates on open mortgages are higher than closed mortgage rates as much as 1%, or more, locking into a 5 year fixed closed at a low rate will not make any sense because you will be penalized to break the term.
Benefits: There are no penalties or additional interest if you re-negotiate the mortgage. Payments can vary depending on what works well for you (for example, if one day you have extra money, you can use it do decrease the mortgage debt). You can refinance the mortgage with another lender if better conditions are offered.

Considerations: The interest rates are higher than those for closed mortgages with similar terms: in fact, you pay more for flexibility.

Closed Mortgage

The most popular type (in fact, most regular borrowers have just it). A Closed Mortgage has prepayment charges if you choose to pay it off prior to maturity, refinance your home or transfer your mortgage to another lender.

You can repay it in whole with a penalty of either 3 months' worth of interest or the difference between your current contracted mortgage rate and the lender's current available rate for a similar term (i.e. if current rates on the market are lower then your rate, you will compenste the lender its lost) - the higher of the two. That logic works also for refinancing, which is, in fact, paying the existing mortgage off in whole and taking a brand new mortgage.

In addition, some methods of faster repayment (such as increasing periodic payment or making lump sum payments) are typically allowed.

Benefits: Despite the fact that you have to pay a penalty, you can pay the mortgage off or refinance it with another lender.

Considerations: The penalty to fully prepay the mortgage may outweigh the benefits of refinancing with another lender (the cost of the penalty may be more than the amount saved by refinancing at a lower rate).

The expression 'closed mortgage' originates from the 1980's when this type of mortgage was literally 'closed'. You contracted to the lender to make your payments for the term chosen, you could not pay anything additional, nor could you pay off the entire amount for any reason except the sale of your property. These days, there are many ways to pay down your mortgage principal quicker, though the name 'closed' mortgage still remains.

Convertible Closed Mortgage

Gives you the same benefits as a regular Closed Mortgage, but has a very short term (usually 6 months). It can be converted to a longer term (like to a classic 5-years Closed Mortgage) at any time without any prepayment charges.

A convertible mortgage provides you with a temporary solution if your situation is uncertain. It might be right for you if you think mortgage interest rates might decrease soon or you need more time to decide which mortgage option fits best for you.


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