Prepayment restrictions are the fundamental difference between open and closed mortgages.
Despite the restrictions on closed mortgages, they do allow some prepayment privileges. Here’s a quick overview:
If you’ve managed to save some money, got a raise, won the lottery, or experienced any other positive change in your financial position, you might be tempted to accelerate your mortgage payments.
Before doing so, ask yourself, “Is my money better spent elsewhere?”
To answer this question, people compare the interest rate they pay on their mortgage to the after-tax return they can earn by deploying their cash elsewhere.
For example if your mortgage rate is three percent and you have a credit card balance at 20 percent interest, paying down the credit card first is clearly beneficial. Or perhaps you believe that you can earn more than three percent by investing your money.
The higher the interest rate on your mortgage the more it makes sense to exercise your prepayment privileges and pay it down sooner.
Are you considering pre-paying your mortgage? Use the Rates.ca Mortgage Penalty Calculator to find out how much it will cost.