Paying Off a 7- or 10-Year Mortgage Early in BC: The Five-Year Rule

If you signed a 7- or 10-year fixed mortgage, you may assume that leaving early always means a large penalty. For many homeowners, a federal rule changes that once five years have passed.

This article focuses on what changes after year five. It also covers the exception for corporate borrowers, open mortgages and prepayment privileges, and the written statement your lender must give you when you confirm a prepayment.

This article covers the law of British Columbia.

What Interest Act section 10 says

Under section 10 of the federal Interest Act, where a mortgage's repayment is not due until more than five years after the date of the mortgage, the borrower may pay it off at any time after five years. To do so, the borrower pays the principal, the interest owing, plus three months' further interest in lieu of notice.

In plain terms, once the five-year mark has passed, the cost of leaving a long-term mortgage is capped at a modest amount. The interest rate differential is not part of what this section describes.

How this compares with the first five years

Before that point, the prepayment charge is usually the higher of three months' interest on the remaining balance or the interest rate differential (IRD). The IRD compares the interest remaining on your term at your contract rate with the interest at the current posted rate for a similar term, and takes the difference.

FCAC gives an example with a $200,000 balance, a 6% rate, a 4% posted rate and 36 months left. Three months' interest comes to about $3,000, while the IRD comes to about $12,000. That gap is why the timing of a payout matters.

When section 10 does not apply

Section 10 does not apply to mortgages given by joint stock companies or other corporations, or by certain prescribed entities. If your property is held through a company, your mortgage may fall outside this rule, so check who the borrower is named as on the mortgage.

• Mortgage signed by you personally: section 10 may be available once the conditions are met.
• Mortgage signed by a corporation: section 10 does not apply.
• Mortgage with a term of five years or less: the rule is about repayment not due until more than five years after the date.

Open mortgages, privileges and your lender's statement

An open mortgage allows prepayment without penalty. Prepayment privileges, such as extra lump sums or payment increases up to a lender cap, can also be used without penalty, and unused amounts usually do not carry over. Other ways to limit a penalty include asking about porting the mortgage to a new home, or waiting until the term ends if the penalty is large.

Under the FCAC Code of Conduct on mortgage prepayment information, when you confirm that you are prepaying, your lender must give you a written statement of the prepayment charge, how it was calculated, how long it is valid and the factors that could change it. If an IRD is used, the statement must show the outstanding amount, annual rate, comparison rate used and remaining term. Lenders must also post online prepayment-charge calculators.

The 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 document and confirm the date, the term and who the named borrower is.
• Check whether more than five years have passed since the date of the mortgage.
• Ask your lender, in writing, for a prepayment statement and compare it with what section 10 describes.
• Check whether open features or prepayment privileges could reduce what you owe.
• Have a lawyer review the mortgage if the lender's figure looks higher than expected, or if a corporation is involved.

Mortgage wording and lender practices vary, so a lawyer can confirm how the rule applies to your particular mortgage before you commit to a payout or a new lender.

Frequently asked questions