Closed Mortgage

A closed mortgage is a mortgage loan with limited prepayment privileges and a prepayment penalty if the borrower pays off the loan—or pays down principal beyond the permitted prepayment amount—before the end of the mortgage term. Closed mortgages typically offer lower interest rates than open mortgages because the lender has greater certainty about the loan's duration. The specific prepayment privileges and penalty calculation methods are set out in the mortgage contract between the borrower and lender. Verify the terms of any mortgage contract with a BC lawyer or notary before signing.

Mortgage contracts in BC are governed by general contract law and the Land Title Act, RSBC 1996, c. 250, which provides the framework for registering mortgages against title. If the mortgage is arranged through a licensed mortgage broker, the British Columbia Financial Services Authority (BCFSA) regulates the broker under applicable BCFSA Rules, but the BCFSA does not set the interest rate, prepayment terms, or penalty formulas—those are negotiated between borrower and lender. Federally regulated lenders (banks) are subject to oversight by the Financial Consumer Agency of Canada (FCAC) and may have disclosure obligations under federal consumer-protection frameworks. Verify specific regulatory requirements with a BC lawyer or notary.

Prepayment penalties are set by the lender and disclosed in the mortgage contract; there is no single BC statute that mandates a specific penalty formula. Common penalty calculations include three months' interest or an interest-rate differential (IRD) calculation, whichever is greater, but the exact method and amount depend on the lender's policies and the contract terms. Because penalty amounts can be substantial—sometimes tens of thousands of dollars—it is essential to review the prepayment and discharge clauses with a BC lawyer or notary before committing to a closed mortgage. Verify the penalty calculation method in your specific mortgage agreement.

Most closed mortgages in BC include limited prepayment privileges that allow the borrower to make extra lump-sum payments or increase regular payment amounts by a certain percentage each year without incurring a penalty—for example, 10% to 20% of the original principal per year (as of 2026-07-27 — verify current). The specific prepayment privileges are defined in the mortgage contract and vary by lender. Payments beyond the permitted prepayment amount will trigger the prepayment penalty. Verify the prepayment terms in your mortgage contract with a BC lawyer or notary before making extra payments.

A closed mortgage restricts prepayment and charges a penalty if the borrower pays off or pays down the loan beyond the permitted amount before the term ends, whereas an open mortgage allows the borrower to repay any amount—or the entire principal—at any time without penalty. Closed mortgages typically carry lower interest rates because the lender has more certainty about the investment duration. The choice between open and closed depends on the borrower's financial situation, plans to sell or refinance, and tolerance for prepayment restrictions. Verify which type suits your circumstances with a BC mortgage broker, lawyer, or notary.

If you sell your property and discharge (pay off) your closed mortgage before the term expires, you will generally owe a prepayment penalty as specified in your mortgage contract—unless the mortgage is portable and you transfer it to a new property, or unless your prepayment privileges cover the full remaining balance. The penalty is calculated according to the lender's formula (often three months' interest or an interest-rate differential). Because penalties can be significant, review your mortgage contract's portability, assumability, and prepayment clauses with a BC lawyer or notary before listing your home. Verify the specific penalty and options with your lender and legal advisor.

Tax treatment of mortgage prepayment penalties is governed by federal income tax law under the Income Tax Act (Canada), not BC provincial statutes. Generally, prepayment penalties on a mortgage secured by your principal residence are not deductible, but penalties on investment or rental properties may be deductible as a financing expense—subject to Canada Revenue Agency (CRA) rules and eligibility criteria. Because tax rules are complex and fact-specific, verify the deductibility of any prepayment penalty with a licensed tax professional or accountant before filing your return.

A closed mortgage can be refinanced before the term ends, but doing so typically requires paying out the existing mortgage in full, which will trigger the prepayment penalty specified in your mortgage contract. Some lenders offer blend-and-extend options or internal refinancing products that may reduce or waive the penalty, but these are lender-specific and not mandated by BC law. Verify the costs, penalty calculation, and any available options with your current lender and a BC mortgage broker, lawyer, or notary before proceeding with a refinance.

Canada Mortgage and Housing Corporation (CMHC)—a federal Crown corporation—does not require borrowers to choose a closed mortgage to qualify for mortgage default insurance; CMHC insures high-ratio mortgages (those with less than 20% down payment as of 2026-07-27 — verify current) based on creditworthiness, property type, and loan-to-value ratio, not on whether the mortgage is open or closed. However, individual lenders may have their own policies about the types of mortgages they offer to insured borrowers. Verify CMHC insurance eligibility and lender requirements with a BC mortgage broker or the lender directly.

The BC government does not publish a dedicated statute or regulatory guide specific to closed mortgages; mortgage contract terms—including prepayment privileges and penalties—are primarily a matter of negotiation between borrower and lender, subject to general contract and consumer-protection principles. The Financial Consumer Agency of Canada (FCAC) provides federal educational resources on mortgage types and prepayment for federally regulated lenders, and the BC Financial Services Authority (BCFSA) oversees licensed mortgage brokers under the BCFSA Rules. For legal interpretation of your mortgage contract and your rights under BC law, consult a BC lawyer or notary.