- The prepayment penalty is usually the higher of 3 months' interest on what you still owe or the interest rate differential (IRD).
- Federally regulated lenders must set out prepayment privileges and penalties in an information box at the start of the mortgage agreement.
- Porting or a longer-term payout right may help in some cases, but both depend on your contract and your situation.
Selling, moving, refinancing or switching lenders before your term ends usually means breaking your mortgage. That can come with a penalty large enough to affect your plans.
This article explains the two usual penalty measures, where to find your own numbers and what options may reduce the cost. The exact calculation depends on your mortgage contract.
The two usual penalty measures
If you break a mortgage contract, the prepayment penalty is usually the higher of 3 months' interest on what you still owe or the interest rate differential (IRD).
| Measure | Plain meaning |
|---|---|
| Three months' interest | Interest on the balance you still owe, for a period of three months. |
| Interest rate differential (IRD) | A comparison of your rate with current rates, over the time left in your term; the lender's contract sets how it is worked out. |
Because the penalty is usually whichever is higher, your lender compares both and charges the larger one. Lenders can use different formulas for the IRD, so two mortgages with the same balance can have different penalties.
Where to find your numbers
Federally regulated lenders must set out prepayment privileges and penalties in an information box at the start of the mortgage agreement. Start there. For other lenders, look in the prepayment or payout section of your contract.
Before you sell or refinance, ask the lender for a written payout statement showing the penalty and how it was calculated. A lawyer can compare it with your contract if the figure looks wrong.
Options that may reduce or avoid a penalty
- Porting: a portable mortgage lets you transfer your balance, interest rate and terms to a new home, avoiding breaking the contract. Whether it can be ported, and on what conditions, depends on the lender.
- Porting to a cheaper home: if the new home costs less than the amount of the mortgage, you may still pay a prepayment penalty.
- Longer terms: where the term is longer than five years, after five years from the mortgage date you may pay off the principal and interest plus three months' further interest in lieu of notice. This does not apply to a mortgage given by a corporation.
- Relief options: a lender may offer blend-and-extend, interest-only payments for a limited time, or a sale-by-borrower plan in which you sell at fair market value and can usually stay up to 90 days.
If you are in financial difficulty
If you are at risk of default, talk to your lender early. Federally regulated lenders are expected to give tailored relief to borrowers at risk of default on their principal residence, which can include waived prepayment penalties and internal fees, but your express consent is required. Those expectations apply to banks and other federally regulated lenders, and only to an existing residential mortgage on your principal residence.
A payment deferral is an agreement with the lender, not a right. It usually lasts up to 4 months, and interest keeps accruing and is usually added to the principal.
What to do next
- Find the prepayment section or information box in your mortgage agreement.
- Ask your lender for a written payout figure and calculation.
- Ask whether your mortgage is portable and on what terms.
- Check whether you are past five years on a term longer than five years.
- Have a lawyer review the figures before you sign a sale, purchase or refinance.
Frequently asked questions
How is the prepayment penalty usually calculated?
It is usually the higher of 3 months' interest on what you still owe or the interest rate differential. Your contract sets how the IRD is worked out.
Do all lenders show the penalty at the start of the agreement?
Federally regulated lenders must set out prepayment privileges and penalties in an information box at the start of the mortgage agreement. For other lenders, check the prepayment section of the contract.
Can I avoid the penalty by porting?
Porting avoids breaking the contract, but whether it is available and on what conditions depends on your lender. If the new home costs less than the mortgage amount, you may still pay a penalty.
Is there ever a right to pay off a mortgage without the usual penalty?
Where a term is longer than five years, after five years from the mortgage date the borrower may pay off the principal and interest plus three months' further interest. That right does not apply to a mortgage given by a corporation.
Sources
- Justice Laws – Interest Act, s. 10 — Justice Laws (federal)
- Financial Consumer Agency of Canada – Mortgage payment deferrals — canada.ca
- Financial Consumer Agency of Canada – Paying your mortgage when experiencing financial difficulties — canada.ca
- Financial Consumer Agency of Canada – Mortgage relief options — canada.ca
- Financial Consumer Agency of Canada – Choosing a mortgage — canada.ca
- Financial Consumer Agency of Canada – Mortgage fees: Prepayment penalties — canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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