Breaking a Mortgage Early in British Columbia: How the Penalty Works

Selling your home or refinancing before your mortgage term ends often triggers a prepayment charge. The amount can surprise people, because it depends on your interest rate, the balance left and how much of the term remains.

This article explains the two common ways the charge is worked out, how you may be able to limit it, and what your lender must tell you. Contracts differ, so your own mortgage documents decide what applies to you.

This article covers the law of British Columbia.

The two usual calculations

The prepayment charge is usually the higher of two amounts: three months' interest on the remaining balance, or the interest rate differential, often called the IRD. Your lender applies whichever is larger.

How the interest rate differential works

For the IRD, the lender works out the interest remaining on your term at your contract rate. It then works out the interest on the same period at the current posted rate for a similar term, which may be reduced by your original discount, and takes the difference.

The gap can be large. In one FCAC example, a $200,000 balance at a 6% rate, a 4% posted rate and 36 months left gives about $3,000 as three months' interest, but about $12,000 under the IRD. FCAC notes the IRD is typically used where your contract rate is higher than the current rate, and each lender's formula differs, so ask yours how it calculates the figure.

Ways to reduce or avoid the penalty

An open mortgage allows prepayment without a penalty. Prepayment privileges, such as extra lump sums or payment increases up to a limit set by the lender, can also be used without a penalty, and unused amounts usually do not carry over.

• Use your prepayment privileges before you break the mortgage.
• Ask whether the mortgage can be ported, meaning moved to a new home.
• If the penalty is large, consider waiting until the end of the term.

Rules that protect you when you pay out

Under the federal Interest Act, if a mortgage is not due until more than five years after its date, you may pay it off at any time after five years by paying principal, interest and three months' further interest in lieu of notice. This does not apply to mortgages given by corporations or certain prescribed entities.

When you confirm you are prepaying, the lender must give you a written statement of the charge, how it was calculated, how long the figure is valid and factors that could change it. If an IRD is used, it must also show the outstanding amount, the annual rate, the comparison rate and the remaining term. Lenders must also post online prepayment-charge calculators. This Code does not apply to mortgages entered into for business purposes or held by borrowers who are not natural persons.

What to do next

• Find your mortgage contract and check whether it is open or closed and what prepayment privileges it gives.
• Ask your lender for the written prepayment statement and compare it with the lender's online calculator.
• Ask how the comparison rate was chosen if an IRD applies.
• Check whether porting or waiting for the term end would cost less overall.
• Talk to a lawyer before you sign a sale or refinance if the numbers or the contract wording are unclear.

Frequently asked questions