What Happens if I Sell My House for Less Than I Owe in Ontario?

Owing more than your home is worth is stressful, and it often raises fears about shortfalls, lender approval and losing the property. The right path depends on your mortgage, your lender and your finances, so it is worth getting facts early.

This article covers the parts of the process that follow clear rules: what a payout can include, ways to reduce penalties, other debts on title, and a spouse's rights. It also explains where you need a lawyer's advice.

What you owe is more than the mortgage balance

When you sell, the amount needed to discharge your mortgage can include more than the principal. A closed-mortgage prepayment penalty 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.

An open mortgage can be broken without a prepayment penalty, but sellers may still face administration, appraisal, reinvestment and discharge fees, and may have to repay any cash back received.

Whether you can sell for less than the payout, whether the lender must agree, and who covers any shortfall depend on your mortgage contract and the lender. Ask your lawyer to review these before you list.

Get the lender's numbers in writing

Under the federal Code of Conduct on mortgage prepayment information, lenders must explain how they calculate the prepayment charge and how they choose the IRD comparison rate. When a borrower confirms a prepayment, the lender must give a written statement of the calculation, including the comparison rate and remaining term used. On request, lenders must give a written statement of the current charge through a toll-free line.

This code applies to federally regulated financial institutions. Penalty formulas differ by lender and contract, so your mortgage terms and the lender's payout statement are what count.

Ways to reduce the cost

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

If your mortgage was not due until more than five years after it was made, you 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. The Ontario Mortgages Act gives the same right.

An open mortgage can be broken without a prepayment penalty. Even so, sellers breaking a mortgage may face administration, appraisal, reinvestment and discharge fees, and may have to repay any cash back received.

Other limits on selling

Other debts can also stand in the way. Unpaid property taxes are a special lien that ranks ahead of every other claim except the Crown's. 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.

If the home is a matrimonial home, a spouse may not sell or mortgage an interest in it unless one of these applies: the other spouse joins in or consents; the other spouse has released their rights in a separation agreement; a court order authorizes it; or another property is registered as the matrimonial home by both spouses. A sale made without the required consent can be set aside, unless the current holder bought for value, in good faith, and without notice that it was a matrimonial home.

Power of sale and foreclosure are lender remedies with their own procedures and timelines. A lawyer should review your mortgage and any notices you have received as soon as possible.

What to do next

• Contact your lender and ask for a written payout statement and an explanation of the penalty.
• Ask your lender about options such as porting, prepayment privileges or waiting until the end of the term.
• Have a lawyer search title for taxes, liens and writs.
• If you are married, talk about spousal consent before you list.
• If you have received any notice from your lender, see a lawyer promptly.

Frequently asked questions