How Does Paying Off My Mortgage When Selling a House Work in Ontario?

If you still owe money on your home, selling can mean ending your mortgage early, and the cost depends on your contract. How the payout fits into your closing depends on your lender and your sale agreement, so it is worth confirming with a lawyer.

This article explains the general rules on penalties, the statutory right to pay off after five years, and other things that can be registered against your home. Your own mortgage terms and your lender's payout statement govern the exact numbers.

The basic idea: the lender is paid on closing

If you still owe money on your mortgage when you sell, the payout is something to sort out with your lender well before closing. Exactly how and when that happens depends on your mortgage terms, your lender and your agreement of purchase and sale. A payout statement from your lender shows what is owing, and your lawyer can explain how it fits into your closing.

If a mortgagee cannot be found, or a discharge cannot otherwise be obtained, the court may allow the amount owing to be paid into court and order the mortgage discharged. A registered court discharge order has the same effect as a discharge signed by the mortgagee. This is an unusual route, so get advice if you face it.

Prepayment penalties

Ending a closed mortgage early often brings a penalty. It is usually the higher of three months' interest or the interest rate differential (IRD). Lenders generally use the IRD when the mortgage rate is above the current rate and the contract was signed less than 5 years ago. IRD comparisons are typically based on the lender's posted rates.

Formulas differ by lender and contract, so read your mortgage terms. Federally regulated lenders must explain how they calculate the charge and choose the IRD comparison rate. When you confirm a prepayment, the lender must give a written statement of the calculation, including the comparison rate and remaining term used. On request, they must give a written statement of the current charge through a toll-free line.

Ways to lower the cost

• Use your yearly prepayment privileges to reduce the balance the penalty is based on.
• Port the mortgage, which means keeping its rate and terms for a new home.
• Wait until the end of the term, if your timing allows.

Even with an open mortgage, sellers breaking a mortgage may face administration, appraisal, reinvestment and discharge fees, and may have to repay any cash back received. Ask your lender for a full list of charges before you set a closing date.

The five-year rule

There is also a statutory right to pay off a long mortgage. Under the federal Interest Act, if a mortgage is not due until more than five years after it was made, the borrower may pay it off at any time after five years by paying the principal and interest owing plus three months' further interest in lieu of notice.

Ontario's Mortgages Act gives the same right. Once more than five years have passed on a mortgage not due until after five years, the borrower may redeem by paying the amount due plus three months' interest in lieu of notice. Whether this applies to your mortgage depends on its terms and dates, so confirm with a lawyer.

Other claims on title and what to do next

The mortgage may not be the only thing registered on your property. Each of these can affect your closing:

• Unpaid property taxes are a special lien that ranks ahead of every other claim except the Crown's.
• If tax arrears remain owing on January 1 in the second year after they became owing, the treasurer may register a tax arrears certificate on title. Before the one-year period ends, it can be cancelled by paying the cancellation price.
• The CRA can register a certificate of an unpaid tax debt, and a memorial of it may then be registered in the land registry as a charge on the debtor's land.
• A writ of execution binds the debtor's lands from the effective date noted in the sheriff's index.
• A contractor's lien is preserved by registering a claim for lien on title. When money or security is paid into court, the court must make an order vacating the lien.
• Consumer Notices of Security Interest are treated as expired since June 6, 2024. An expired one may still appear on title but does not affect the land.

• Request a written payout statement from your lender.
• Check your mortgage for open or closed status, prepayment privileges and portability.
• Look at your mortgage's date and term to see whether the five-year rule applies.
• Ask your lawyer to search title for liens, tax arrears and other charges.
• Confirm whether your closing date lines up with the end of your term.

Frequently asked questions