Mortgage Loans in Canada Explained

A Closed Term mortgage means you cannot prepay the entire mortgage loan before the end of the mortgage term. You will be penalized if you choose to prepay the mortgage loan before the end of the mortgage term. This penalty is called the prepayment penalty.  

Lenders offer different forms of prepayment options in their closed-term mortgage programs. These embedded prepayment options provide the flexibility to pay down the mortgage loan above the required monthly or yearly obliged amount.  

Prepayment terms are often stated as 20/20, 25/15, or 10/10. 

For example, the 20/20 Prepayment Term means you can prepay up to 20% of your start-of-the-year mortgage balance within each year of your contract term by making either one lump sum or an increase in your required monthly mortgage payment. 

Let’s say that for the start of this year, you owe $350,000.00 on your mortgage, and it has an embedded 20/20 prepayment option. You can pay up to $70K towards the principal portion of your mortgage loan by making a lump-sum payment or in part over one year. 

On the other end, there is an Open Term mortgage loan. This mortgage loan term allows you to prepay part or all of your mortgage loan without penalty. If you expect a considerable inflow of cash shortly, which you want to use to pay off your mortgage, then an open-term mortgage loan might be the right one for you. This open prepayment flexibility comes with a high price tag of a high mortgage rate compared to a closed mortgage loan program.