What happens if I pay off or break my mortgage before the term ends?

Three months' interest or the differential

Closed mortgages allow early payout but at a cost the mortgage itself sets out, most often the greater of three months' interest or an interest rate differential, comparing your rate against the lender's current rate for the time remaining on your term. Variable terms are commonly, though not always, limited to three months' interest without a differential.

Lenders are expected to disclose how the differential is calculated and to provide the figure on request; ask for it in writing before deciding anything.

The Interest Act's five-year rule

Section 10 of the federal Interest Act addresses mortgages where payment is not due for more than five years from the date of the mortgage. Once five years have passed, a person entitled to pay may tender the amount owing plus three months' further interest instead of the notice otherwise due, and no further interest is chargeable after that payment. The section carries exceptions, including for mortgages given by a corporation.

This is a federal statutory floor, separate from whatever your own mortgage document says about earlier payout.

Paying down without paying off

Most closed mortgages include prepayment privileges allowing extra lump-sum payments, often up to a set percentage of the original principal each year, without triggering the early payout charge. These privileges are set by the mortgage contract and vary by lender; using them fully before renewal can reduce a later payout charge by lowering the balance it is calculated against.

Check whether unused privileges from previous years carry forward, since some lenders allow this and others do not.

Getting a payout statement

Before paying out a mortgage, ask the lender in writing for a payout statement: the outstanding balance, interest to a stated date, a per-day figure if the date moves, any early payout charge and the lender's own discharge fee. This is the figure your lawyer needs to arrange the payout and, once it is paid, to obtain the registered discharge from title.

Payout statements are usually valid for a limited time, so time the request to when you actually intend to pay.