A borrower's mortgage lets her prepay up to 15% of the original principal each year without penalty, but charges a prepayment penalty on any amount above that. Which type of mortgage is this?
Correct Answer
A) A closed mortgage
The Financial Consumer Agency of Canada explains that closed mortgages usually limit how much extra money you can put toward the mortgage each year, through prepayment privileges set out in the contract. A fixed annual limit with a penalty beyond it describes a closed mortgage; open mortgages allow more flexibility to pay extra.
Why This Is the Correct Answer
FCAC describes closed mortgages as usually limiting the extra amount a borrower can pay each year, with the limit written into the contract as a prepayment privilege. A 15% annual allowance with a penalty above it fits that description.
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