Are there penalties for early mortgage
repayment?
Can you sell your Georgetown home without getting hit by a massive mortgage penalty? Here’s the blunt truth and a step-by-step playbook to avoid paying too much.
Quick answer — yes, there can be penalties for early mortgage repayment
If you break a closed mortgage early, you may face a penalty. Open mortgages usually let you repay with no penalty. The real cost depends on the mortgage type, your lender’s rules, and the remaining term.
This post explains exactly how penalties are calculated in Canada, what matters for home sellers in Georgetown, ON, and the practical moves that save you thousands. Read this before you sign any payoff or listing paperwork.
How mortgage penalties work in Canada (plain and simple)
In Canada most lenders use two methods to calculate a penalty for breaking a closed mortgage:
- 3 months’ interest: Simple. Lender charges three months of interest on your outstanding balance.
- Interest Rate Differential (IRD): More complex. The lender compares your contract rate to today’s rates for the remaining term and charges the difference.
The lender charges whichever of the above is greater. Variable-rate closed mortgages often use the 3-month rule. Fixed-rate closed mortgages usually use IRD or 3 months’ interest, whichever costs more.
Tip: Each lender calculates IRD slightly differently. Always get a written payoff quote.
Why this matters for sellers in Georgetown, ON
Georgetown is part of Halton Hills — a market where timing matters. Sellers often face three common scenarios:
- Selling to buy another home in GTA: You may want to port your mortgage to the new property. Porting avoids penalties if the lender allows it and the new mortgage amount and qualifications line up.
- Selling and moving out of market or renting: You’ll likely need to discharge the mortgage at closing and may pay a penalty.
- Fast sale under market pressure: You might accept a price that doesn’t cover penalty costs. Plan ahead so penalties don’t eat your proceeds.
Because properties in Georgetown can move fast, get your mortgage facts before listing. That one call can change whether you net $10,000 or $30,000 at closing.
Real, practical steps Georgetown home sellers must take (playbook)
- Get a payoff quote from your lender — immediately
Ask for a written payoff figure and a breakdown of the penalty method (3 months’ interest vs IRD). The payoff figure shows the exact dollars you’ll need at closing.
- Check if your mortgage is portable
Porting lets you move the existing mortgage to a new property without penalty. Lenders often allow this, but there are conditions: the new property must qualify, and your income must still meet lender requirements.
- See if you have prepayment privileges
Many closed mortgages allow some prepayment each year (often 10%–20% of the original balance or specific lump-sum amounts). Use that to reduce balance before selling.
- Compare penalty vs. new mortgage savings
If your current rate is high, you might break the mortgage, pay the penalty, and re-mortgage at a lower rate — and still come out ahead. Run the numbers with a mortgage broker.
- Consider transferring the mortgage to the buyer (assumption)
Some buyers will assume an existing mortgage if terms are good. This needs lender approval, but it can eliminate your payout penalty.
- Time the sale if you can
If renewal is just weeks away, waiting could reduce or eliminate a penalty. But don’t let timing hurt your sale price.
- Ask the Realtor to structure offers to cover payoff costs when necessary
If you need the sale to net a certain amount, put a clause in the offer or price the home accordingly. Your agent should factor the payoff and penalty into the net proceeds worksheet.
- Use bridge financing carefully
If you can’t port and need to buy first, short-term bridge financing may be cheaper than a large penalty in some cases.
Example: How penalties can add up (numbers matter)
Scenario: Outstanding balance $300,000, contract rate 4.50%, remaining term 3 years.
- 3 months’ interest method: 300,000 × 4.50% ÷ 12 × 3 = $3,375.
- IRD (approximate): Lenders use current fixed rates for similar terms. If the comparable rate is 2.50%, then IRD rough estimate = 300,000 × (4.50% − 2.50%) × 3 years = $18,000 (note: IRD is often calculated more precisely as a discounted cash flow; this is a conservative approximate to show scale).
Conclusion: IRD can be dramatically larger than 3 months’ interest. That’s why you must get a written payoff from your lender. Exact IRD varies by lender and how they calculate — never guess.
Local lender behavior and what sellers need to know in Georgetown
Major Canadian banks (RBC, TD, Scotiabank, BMO, CIBC) and credit unions serving Halton Hills generally follow the IRD vs 3-month rule. However, local credit unions or smaller lenders may have different portability or prepayment rules. If your mortgage is with a local credit union in Milton or Georgetown, call them early; credit unions can be more flexible on porting and assumptions.
Common local situations:
- Mortgage with local credit union: You may get more flexible porting or approval timelines.
- Mortgage with big bank: Exact IRD calculations are strict. Get a written quote.
- Private mortgages: Terms can vary widely. Penalties might be contractual and steep.
What to ask your lender — the five questions that save money
- What is my exact payoff figure today, including any penalties and discharge fees?
- Which penalty will apply: 3 months’ interest or IRD? Show the math.
- Is my mortgage portable to another property? What’s the process and timeline?
- Do I have any unused prepayment privilege left this year? How much?
- Are there discharge or legal fees I should expect at closing?
Get all answers in writing and bring the payoff quote to offers and closing planning.
Sell smarter — negotiation tactics when penalties are large
- Negotiate an assumption: Offer buyer credit or price adjustment for assuming the mortgage (with lender approval).
- Ask the buyer to pay a portion of the penalty if they’re getting a move-in-ready home and a price break.
- Build the penalty into your list price and explain the math in your net sheet.
Your agent should model net proceeds for each scenario and present the clean math to buyers.
Closing logistics — when and where the penalty gets paid
The penalty is typically paid on closing day out of sale proceeds. Your lawyer or notary will request the payout statement and ensure the lender is paid. If the penalty is large, the sale proceeds can be withheld until the lender is satisfied.
Final decision framework for Georgetown sellers
- Get payoff and prepayment details now.
- If portable and you’re buying locally, port the mortgage.
- If penalty is small, compare to long-term savings if you switch lenders.
- If penalty is large, explore assumption by buyer or bridge options.
- Plan listing price and contracts to protect net proceeds.
Act now — market conditions change weekly. Don’t list without knowing your exact payoff.
About local help
If you’re selling in Georgetown and want a local plan that protects your cash at closing, get help. Tony Sousa is a Georgetown real estate professional who works with lenders, mortgage brokers, and lawyers to get you the payoff numbers, porting answers, and negotiation options. Contact: tony@sousasells.ca | 416-477-2620 | https://www.sousasells.ca
FAQ — early mortgage repayment and selling in Georgetown, ON
Q: Are penalties legal in Ontario?
A: Yes. Mortgage penalties are contract-based and legal. They’re standard across Canada for closed mortgages.
Q: Can I avoid penalties by selling to a buyer who assumes my mortgage?
A: Possibly. Assumption needs lender approval. If the buyer qualifies, assumption can eliminate your penalty.
Q: What is IRD and why is it usually higher?
A: IRD (Interest Rate Differential) measures the interest the lender loses when you leave a higher contract rate for a lower market rate. It often exceeds 3 months’ interest, especially when your contract rate is much higher than current rates.
Q: What is a portable mortgage?
A: Portability lets you transfer your mortgage to a new property without penalty subject to lender approval and qualification.
Q: Do all lenders calculate IRD the same way?
A: No. Calculation methods and exact comparable rates vary. Always request a written payoff.
Q: How much notice should I give my lender before closing?
A: Request a payoff statement at least 10–14 business days before closing. Some lenders need more time. For porting, contact your lender as early as possible.
Q: Are prepayment privileges common?
A: Many closed mortgages include annual prepayment privileges, but amounts vary. Check your mortgage contract.
Q: Can penalties be negotiated?
A: Occasionally with smaller lenders or credit unions. Big banks are less flexible. Negotiation is worth trying.
Q: Is the penalty paid at closing?
A: Yes. Your lawyer or notary takes care of paying the lender from sale proceeds.
Q: Should I switch lenders if my rate is high despite a penalty?
A: Possibly. Compare the long-term savings at the new rate to the penalty cost. A mortgage broker can run the numbers.
If you want a clear, local plan before you list in Georgetown, get the payoff numbers now. Email tony@sousasells.ca or call 416-477-2620 for a custom net proceeds worksheet and lender coordination. Your sale should leave money in your pocket — not on the lender’s desk.
