If you sell your Quebec home before your closed mortgage term ends, your lender will usually charge a prepayment penalty: the higher of three months’ interest or the interest rate differential (IRD) on a fixed-rate loan, and usually three months’ interest on a closed variable-rate loan, according to Quebec’s Autorité des marchés financiers (AMF). On a fixed rate, the IRD can be several times larger than three months’ interest. Porting the mortgage to your next home, timing the sale near your renewal date, or using your annual prepayment privileges can reduce or avoid it.
This guide explains how the penalty is calculated, how large it can be, and the options to discuss with your lender before you list. It is general information; your mortgage contract and your lender’s written figure are what count.
Do I pay a mortgage penalty if I sell my house?
Usually, if your mortgage is closed and you repay it before the end of the term. The Financial Consumer Agency of Canada (FCAC) lists paying back your entire mortgage before the end of the term, “including when you sell your home,” as one of the situations where a lender may charge a prepayment penalty (FCAC). An open mortgage can be repaid at any time without a penalty, and no penalty applies if the sale closes on or after your term’s maturity date.
How is a mortgage penalty calculated in Canada?
According to the FCAC, the penalty is usually the higher of:
- Three months’ interest on the balance you still owe, or
- The interest rate differential (IRD): roughly, the interest the lender loses over the rest of your term because current rates are lower than your contract rate.
The FCAC says the lender will usually use the IRD when your mortgage rate is higher than the current interest rate and you signed your current contract less than five years ago. The method varies by lender: the first rate can be the posted rate when you signed or your discounted contract rate, and the second can be the current posted rate for a similar term, or that rate minus the discount you were originally given (FCAC). The AMF notes that some lenders use posted rates on both sides, which is why the rates used matter so much (AMF).
The AMF’s IRD formula
Quebec’s financial regulator illustrates the IRD on a fixed-rate mortgage as: mortgage balance × (posted annual rate at signing − current posted annual rate) × years remaining. In its example, $200,000 × (4.5% − 4.09%) × 4 years = $3,280, compared with three months’ interest of about $1,500 at 3% (AMF). The “posted rate at signing” is the rate you pay plus the discount you received.
The FCAC’s own example
| Assumption | Value |
|---|---|
| Outstanding balance | $200,000 |
| Your rate | 6% |
| Months left | 36 of a 5-year term |
| Lender’s current posted rate for 36 months | 4% |
| Three months’ interest | $3,000 |
| IRD | $12,000 |
| Penalty charged (the higher) | $12,000, plus any administration fee |
That gap, $3,000 versus $12,000, is why sellers should ask for the figure before choosing a listing date, not after accepting an offer.
Is the penalty different with a variable rate?
Usually it is smaller. “If you have a closed mortgage with a variable interest rate, the applicable penalty usually amounts to three months’ interest,” the AMF says (AMF). Three months’ interest is roughly your balance × your annual rate ÷ 4: on $400,000 at 4.5%, that is about $4,500. Check your contract: the FCAC requires federally regulated lenders to disclose prepayment privileges and penalties in an information box at the beginning of the mortgage agreement (FCAC). Caisses and other provincially regulated lenders set out their terms in your contract as well; the AMF advises reading that section carefully and asking the lender to explain it (AMF).
What other fees can apply when I break my mortgage?
The penalty is not the only cost. The FCAC lists fees to ask about before you break a closed mortgage (FCAC, Breaking your mortgage contract):
- administration fees;
- appraisal fees;
- reinvestment fees, which the AMF says may be charged if you break the contract during the first term (AMF);
- a mortgage discharge fee;
- repayment of any cash back you received when you took the mortgage.
If you are staying with the same lender for your next home, ask too about a blend-and-extend, which the FCAC describes as extending your term early and blending the old and new rates without a prepayment penalty, though administrative fees may apply (FCAC).
How can I avoid or reduce the penalty when selling?
- Port the mortgage. If you are buying another home, ask whether you can take your existing rate and terms with you. The FCAC describes porting as taking your existing interest rate, terms and conditions to your new home, which saves you from breaking your contract (FCAC). Lenders set time limits between the sale and the purchase, and any additional amount may be blended at current rates.
- Have the buyer assume the mortgage. Some mortgages are assumable, but only with the lender’s approval and if the buyer qualifies. It is uncommon, but useful when your rate is attractive.
- Use your prepayment privileges first. Prepayment privileges let you increase payments or make lump-sum payments up to a set amount without penalty. The FCAC suggests making a lump-sum prepayment before you break the mortgage so the penalty is based on a lower balance, but warns that some lenders restrict prepayments close to the date you break the contract, and unused amounts usually cannot be carried forward (FCAC).
- Time the closing. The FCAC notes that at the end of your term you can prepay without penalty (FCAC), so if your term ends in a few months, a closing date on or after maturity can eliminate the penalty. Compare that with the carrying costs of waiting.
- Ask for the figure in writing. Request a payout statement for your target closing date. Federally regulated lenders, such as banks, have penalty calculators on their websites (FCAC), but only the lender’s written figure for your exact closing date is reliable.
What else comes off my proceeds at the notary?
The notary pays your mortgage balance, the penalty and the lender’s discharge fees from the sale price, then adjusts municipal and school taxes to the date of the deed. Brokerage commission plus GST and QST is also deducted. See closing costs in Quebec and who pays the notary in a Quebec home sale.
A seller’s mortgage checklist
- Find your maturity date, rate type and whether your mortgage is open or closed.
- Request a written payout and penalty figure for two or three possible closing dates.
- Ask about porting, assumption and prepayment privileges.
- If you are buying again, coordinate with the steps in selling and buying at the same time in Montreal.
- Estimate your net proceeds with a realistic price: start with how much is my house worth in Montreal? or request a home valuation.
Frequently asked questions
Generally only when the mortgage is open or the term has matured. Within a closed term, a penalty usually applies unless you port the mortgage or stay within your prepayment privileges.
Usually, but not always. The AMF says it “usually amounts to three months’ interest”; your contract sets the actual method (AMF).
Possibly: administration, appraisal, reinvestment and discharge fees, and repayment of any cash back (FCAC).
The method is set by your contract. If you are buying again with the same lender, ask about porting or a blend-and-extend, which the FCAC lists as ways to avoid a prepayment penalty.
The seller. It is part of paying off the seller’s loan and is deducted from the sale proceeds at the notary.
For a principal residence, usually not in practice, because the gain is generally exempt; see our guide to the principal residence exemption in Quebec. For a rental or second property, ask your accountant how the penalty is treated.
Planning a sale in Greater Montreal? Talk to our team early so your listing date works with your mortgage.
About the author: Logan Boyce, real estate broker, licence E9010, eXp Agence Immobilière. Logan is team leader of Montreal’s Elite Real Estate Group. His team coordinates property sales with liquidators, families, notaries, inspectors, lenders, insurers and other specialists while keeping professional roles clearly defined.