How an Ontario prepayment penalty is calculated, what the Interest Act allows, and a worksheet for deciding whether breaking makes sense.
⚖️ This is general information, not legal advice. It can't account for your specific situation. Use it to get oriented, then confirm the details with a licensed Ontario lawyer.
Breaking a closed mortgage before the end of its term means paying a penalty set by the contract. For a variable mortgage that is usually three months' interest; for a fixed mortgage it is usually the greater of three months' interest and the interest rate differential, and the differential can be many times larger. This worksheet walks through the calculation, the disclosure you are entitled to, the one rule that overrides the contract, and the columns to fill in before you decide. It explains; it does not recommend a product or a lender.
Step one: find the three documents
- The commitment letter you signed: it names the rate, term, privileges and penalty method.
- The standard charge terms: the lender's filed set, referenced in your registered charge by number, which contain the full penalty clause.
- The information box or cost of borrowing disclosure: for banks, the Financial Consumer Protection Framework Regulations require the prepayment conditions and the penalty method to be set out there.
Step two: three months' interest
Take the balance you intend to pay off, multiply by your annual contract rate, divide by twelve, multiply by three. That is three months' interest. It is the usual penalty on a variable mortgage and the floor on most fixed ones.
If you have an unused prepayment privilege and the lender allows you to use it in the same transaction, reduce the balance first. Many lenders do not allow this on a full payout; ask in writing.
Step three: the interest rate differential
The differential compares your contract rate with the rate the lender says it would charge today for a term equal to your remaining term. The difference, applied to your balance for the months remaining, is the penalty. Two things swing the number. First, which rate the lender compares against: some use the posted rate for the comparison term, some the discounted rate, and some compare your original posted rate less your discount. Second, how many months remain; a differential with four years left is roughly four times one with a year left.
Lenders must disclose the method. If the figure on your payout statement does not match the method in your documents, ask for the calculation line by line. The penalty estimator on this site lets you test the lender's inputs.
Step four: the rule the contract cannot override
Section 10 of the Interest Act, mirrored in section 18 of Ontario's Mortgages Act, applies where a mortgage is not payable until more than five years after its date. Once five years have passed, an individual borrower can pay the balance plus three months' further interest and no more. It does not matter what the contract says. It does not apply to a five-year term, only to longer ones, and section 10(2) excludes mortgages given by corporations.
If your term is seven or ten years and you are past year five, the differential does not apply to you.
Step five: the worksheet
- Column A, the cost of breaking: penalty from the payout statement, plus discharge fee, plus legal and appraisal costs on the new mortgage, plus any fee the new lender charges.
- Column B, the cost of staying: your current payment for the months remaining, plus whatever you are trying to avoid (a sale you cannot make, a rate you cannot lower, a debt you cannot consolidate).
- Column C, the alternative: a new mortgage at today's rate for the same period, or a blended rate from your lender, or porting to the new home.
- The comparison is A plus C against B over the same number of months. If the difference is small, the non-financial reasons decide; if it is large, the number decides.
- Write down the per-diem date on the payout statement. A payout that slips a week costs a week of interest, and the statement may need renewing.
Step six: the options in order of cost
- Use the privilege: penalty-free, limited to the annual percentage, and only if the lender allows it before a payout.
- Port: no penalty if you are buying another home within the window; a blended rate if you borrow more.
- Blend and extend: the penalty spread into a new rate over a longer term with the same lender; run the same arithmetic.
- Wait for maturity: no penalty, and the renewal disclosure gives you at least twenty-one days to shop if your lender is a bank.
- Break and pay: simplest, most expensive, and sometimes still right.
What happens after you decide
On a sale or refinance, the payout is made from your lawyer's trust account on closing, the lender is paid the statement figure plus per-diem, and it delivers a discharge that is registered on title. Check the parcel register a few weeks later. On a lump-sum payout without a sale, you pay the lender directly and ask who registers the discharge and when.
How Treadstone Law can help
The penalty is a number you can check, not a number you have to accept on faith. Get the documents, get the calculation, and put the columns side by side before you sign anything.
Treadstone Law handles real estate matters on a transparent flat fee, with online intake and a real lawyer on your file, across Ontario.
- Start your file online at treadstonelaw.ca/start-file
- See flat-fee pricing at treadstonelaw.ca/pricing
- Learn more about our real estate services at treadstonelaw.ca/real-estate
- Or call us: 1-844-900-1070
This is not legal advice
This guide is general information, not legal advice. Reading it does not create a lawyer-client relationship. Ontario laws and government programs change, and how the law applies depends on your specific facts. For advice about your situation, speak with a licensed Ontario lawyer. Treadstone Law is licensed by the Law Society of Ontario — reach us at 1-844-900-1070 or start a file online.