Breaking Your Mortgage Early in Ontario: Your Legal Options

Life does not always follow the mortgage term. You may need to sell, move for work, or refinance to consolidate debt before the term ends. Whether that is costly depends mostly on what your own mortgage contract says.

This article walks through how penalties are generally calculated, the exceptions, and the alternatives to breaking your mortgage in Ontario. Your lender and your contract set the details, so read both before deciding.

Start with your mortgage contract

Prepayment privileges in a closed mortgage are set out in the mortgage contract. There is usually a yearly limit on extra payments, and not all lenders allow them on closed mortgages. Pull out your mortgage documents and look for the prepayment section, the penalty clause and any porting terms.

If you are having trouble making payments, rather than choosing to leave, contact your bank as soon as you can. Banks may offer relief measures such as waiving prepayment penalties or internal fees, or extending the amortization. These measures are not automatic, and what your lender offers can depend on the type of lender and your situation, so it is worth confirming the details with your lender or a lawyer.

How the penalty is calculated

The penalty for breaking a closed mortgage is usually the higher of three months' interest on the balance or the interest rate differential (IRD). The IRD method depends on your lender's formula and comparison rate, so two lenders can produce very different numbers.

That example is only an illustration. Ask your lender for a written penalty figure that is good for the date you plan to close.

When you may avoid a penalty

• Open mortgage: you can make a prepayment or lump-sum payment without paying a penalty, and you can also prepay without penalty at the end of the term.
• Long-term mortgage: where principal or interest is not payable until more than five years after the mortgage date, it can be redeemed after five years by paying what is owed plus three months' interest in lieu of notice. The federal Interest Act has the same five-year rule.
• Exception for corporations: the five-year right does not apply to a mortgage given by a corporation.

Whether the five-year rule helps you depends on the payment terms in your particular mortgage, so confirm the dates with a lawyer before relying on it.

Alternatives to breaking the mortgage

• Port it: a portable mortgage lets you transfer your existing mortgage to a new home when you sell and buy, but only if your mortgage is eligible. If the new home costs less than your mortgage, you may pay a prepayment penalty. Porting lets you keep your existing rate and terms and avoids breaking the contract and taking out a new one.
• Let the buyer assume it: with an assumable mortgage, the lender must approve the buyer, and lenders may charge a fee to assume it.
• Check your prepayment privileges: they are set out in your mortgage contract, there is usually a yearly limit on extra payments, and not all lenders allow them on closed mortgages.
• Transfer it to a new lender: despite any stipulation to the contrary, a mortgagor entitled to redeem may require the mortgagee to assign the debt and transfer the mortgage to a third person the mortgagor names, instead of discharging it. This does not apply if the mortgagee is or has been in possession.

Selling or refinancing: practical checks

If you sell, you must pay back any home equity line of credit (HELOC). If you refinance, a spouse may need to be involved: a spouse may not mortgage, refinance or put a HELOC on an interest in a matrimonial home unless the other spouse joins in or consents, has released their rights by separation agreement, a court order authorizes it, or both spouses have designated and registered a different property as the matrimonial home. A home can remain a matrimonial home after separation if it was the family residence at that time.

• Read the prepayment, penalty and porting clauses in your contract.
• Ask your lender for a written payout statement and penalty calculation.
• Compare the penalty to the savings from a new rate or a sale.
• Ask whether porting or assumption is available.
• Confirm whether your spouse's consent is needed.
• Have a lawyer review the contract if the numbers are large or unclear.

Frequently asked questions