Paying Off a 7- or 10-Year Mortgage After Five Years in BC

Many people choose a 7- or 10-year fixed term for certainty. Then life changes. You want to sell, refinance or switch lenders, and you ask what it would cost to get out early. The answer can range from modest to very large.

A federal law, the Interest Act, has a rule that can help when a mortgage runs longer than five years. This article explains what it says, who it does not cover, how it compares with the usual penalty, and what you can do to lower the cost. It is general information, not advice on your own mortgage.

This article covers the law of British Columbia.

What Interest Act section 10 says

Section 10 of the Interest Act (Canada) applies where a mortgage's repayment is not due until more than five years after the date of the mortgage. In that case, the borrower may pay it off at any time after five years.

To do so, you pay the principal, the interest owing, and three months' further interest in lieu of notice. In plain words, the rule sets the price of getting out once the five-year mark has passed.

Count the five years from the date of the mortgage, not from the date you first started looking at rates. Your mortgage documents show that date, and a lawyer can confirm how it applies to yours.

When the rule 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, this rule may not be available to you.

• Mortgage not due until more than five years after its date: the rule can apply.
• Mortgage given by a corporation: the rule does not apply.
• Mortgage due in five years or less: the rule as described here is about mortgages not due until more than five years after their date, so how your prepayment is handled depends on your contract and is worth confirming with a lawyer.

The usual prepayment charge

A prepayment charge is usually the higher of three months' interest on the remaining balance or the interest rate differential (IRD).

The lender works out the IRD by calculating the interest remaining on the term at your contract rate and at the current posted rate for a similar term, possibly reduced by your original discount. The difference is the IRD.

Because the charge is usually the higher of the two, that borrower would face the larger figure. Formulas differ by lender, so check your own contract.

Your lender's duty to give a written statement

Under the FCAC Code of Conduct on mortgage prepayment information, when you confirm that you are prepaying, the lender must give you a written statement. It must set out the prepayment charge, how it was calculated, how long it is valid, and factors that could change it.

If the IRD is used, the statement must state the outstanding amount, the annual rate, the comparison rate used and the remaining term. Lenders must also post online prepayment-charge calculators and explain each year how the charge and comparison rate are determined.

The Code does not apply to mortgages entered into for business purposes, or to mortgages held by borrowers who are not natural persons. Read the statement carefully and compare it with what the Interest Act allows.

Ways to lower the cost and what to do next

• Use prepayment privileges. Extra lump sums or payment increases up to the lender's cap can be used without penalty, though unused amounts usually do not carry over.
• Check whether your mortgage is open. An open mortgage allows prepayment without penalty.
• Ask about porting the mortgage to a new home.
• If the penalty is large, consider waiting until the term ends.

• Find the date on your mortgage and your maturity date.
• Confirm whether the borrower is you personally or a corporation.
• Ask your lender for the written prepayment statement.
• Compare that figure with principal, interest and three months' interest.
• Ask a lawyer to review your mortgage before you sign a sale or a new mortgage.

Frequently asked questions