- Your mortgage is paid from the sale proceeds and the lender's charge is removed from title by a discharge.
- Lawyers are advised to ask an institutional lender early whether the lender or the lawyer will prepare and register the electronic discharge.
- Lawyers should not give personal undertakings to obtain discharges of private mortgages after closing unless the agreement expressly allows it.
- The cost of a prepayment penalty depends on the amount prepaid, the months left in the term, interest rates and the lender's own method.
If you have a mortgage, the buyer expects to receive the home free of your lender's charge. That means the lender has to be paid from your sale money and the charge has to come off title when the sale closes.
This article walks through how that generally works, who handles the discharge, what changes with a private lender, and what happens to the money left over. Timing and paperwork vary by lender, so treat this as a map and not a script.
What paying off the mortgage means on closing
A mortgage is registered as a charge against your property. When you sell, the buyer's lawyer wants proof that the charge will be removed. In practice, your lawyer arranges for the lender to be paid from the sale proceeds and for a discharge of the charge to be registered.
The amount owed is more than the principal balance. It includes interest to the payout date and may include a prepayment charge or fees under your contract. Ask your lender for a written payout figure for your closing date, and tell your lawyer early so the number is ready.
Interest and penalties when you pay off early
Whether you pay extra depends on how much of the term is left. For a mortgage not due for more than five years from its date, the borrower may pay it off after the five years by paying principal and interest to the payment date plus three months further interest in lieu of notice, and no further interest may be charged. That rule excludes mortgages given by corporations and certain prescribed mortgages.
If you are still inside the first five years, your contract and the lender's method decide the penalty. The Financial Consumer Agency of Canada says a prepayment penalty is usually the higher of three months' interest on the balance owed and the interest rate differential. An administration fee may also apply. Our companion article on prepayment penalties explains this in more detail.
How the discharge works with an institutional lender
The Law Society of Ontario advises lawyers to ask the institutional lender early whether the lender or the lawyer will prepare and register the discharge. If the lender will register it, the lawyer should get that confirmation in writing.
The answer changes what your lawyer promises the buyer's lawyer. Where the lender registers its own discharge, the seller's lawyer may limit the undertaking to causing a discharge to be registered. Where the lender authorizes the seller's lawyer to prepare and register it, the lawyer can undertake to obtain and register it.
Your lawyer's closing duties include delivering the discharge funds to the lender in a timely manner and getting registration particulars to the buyer's lawyer. For that reason, sending your lawyer the lender's name, account number and contact details promptly helps.
Private mortgages and unusual situations
Private mortgages can be harder because the lender may not have the systems a bank has. The Law Society's position is that, absent an express term in the Agreement of Purchase and Sale, lawyers should not give or accept personal undertakings to obtain and register discharges of private mortgages after closing. How this applies to your sale depends on your agreement, so it is worth confirming with a lawyer.
| Situation | What to expect |
|---|---|
| Institutional lender registers its own discharge | Lawyer may limit the undertaking to causing a discharge to be registered |
| Lender authorizes your lawyer to register | Lawyer can undertake to obtain and register it |
| Private mortgage | No personal undertaking for a post-closing discharge unless the agreement expressly provides for it |
| Lender cannot be found | Removal without a discharge is possible only in rare cases under s. 102 of the Land Titles Act, where the land registrar finds the chargee is not reasonably available and due proof shows the charge is satisfied |
What happens to leftover proceeds, and what to do next
What you receive after the mortgage payout depends on your agreement and the costs of your sale. Ask your lawyer for the expected figure in advance.
If the home was your principal residence, remember that the sale still has to be reported on your T1 return for the year of sale, even if the gain is exempt.
- Find your mortgage documents and note the lender, term end date and prepayment terms.
- Ask the lender for a written payout figure for your closing date.
- Tell your lawyer early if the mortgage is private, or if you have more than one charge.
- Ask whether the lender or your lawyer will register the discharge, and get it in writing.
- Ask your lawyer for an estimate of the proceeds you will receive after payout.
- Plan to report the sale on your tax return.
Frequently asked questions
Do I need to pay my mortgage off before I list my home?
Usually not. The mortgage is generally paid from the sale proceeds on closing through your lawyer. You should still check your contract for penalties before you pick a closing date.
Who registers the discharge of my mortgage?
It depends on the lender. Lawyers are advised to ask an institutional lender early whether the lender or the lawyer will prepare and register it. If the lender registers it, the lawyer should get that confirmation in writing.
Can the discharge be left until after closing?
For private mortgages, the Law Society's position is that, absent an express term in the Agreement of Purchase and Sale, lawyers should not give or accept personal undertakings to obtain and register discharges after closing. For other lenders, ask your lawyer how it will be handled.
Is there a cap on what I pay if I sell after five years?
For a mortgage not due for more than five years from its date, after the five years the borrower may pay it off with principal and interest to the payment date plus three months further interest, and no more interest may be charged. Mortgages given by corporations and certain prescribed mortgages are excluded.
Sources
- Interest Act (Justice Laws), s. 10 — Justice Laws (federal)
- FCAC – Mortgage fees: Prepayment penalties — canada.ca
- Law Society of Ontario – Mortgage Transactions in Electronic Registration — lso.ca
- Law Society of Ontario – Practice Guidelines for Electronic Registration — lso.ca
- CRA – Reporting the sale of your principal residence — 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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