Selling a House With a Mortgage

Considering selling your home in Canada before your mortgage term ends?

It’s a common process in Canada, but it’s essential to understand how breaking your mortgage can affect your finances.

Whether you hold a fixed or variable-rate mortgage, knowing your options, penalties, and the “porting” process can help you make an informed home buying decision that aligns with your financial goals.

What Happens to Your Mortgage When You Sell?

When you sell a property with an outstanding mortgage, the mortgage itself doesn’t automatically transfer to a new owner. Instead, you have a few main options:

1. Pay Out the Mortgage: This involves closing your mortgage entirely and paying any applicable penalties.

2. Port the Mortgage: You transfer your current mortgage to a new property, retaining the same rate and term.

3. Blend and Extend: This option may allow you to combine your existing rate with current rates if you're taking on a new loan.

The 3-Month Interest Penalty & Interest Rate Differential (IRD)

Most Canadian lenders charge a 3-month interest penalty, which is based on the outstanding mortgage balance and your current interest rate.

Some lenders may also impose an Interest Rate Differential (IRD), which can be even higher than the 3-month penalty if your current rate is well above prevailing rates. The IRD is based on the difference between your rate and the current rate, multiplied by the time left on your term. If your mortgage is nearing the end of its term, the IRD might be minimal, but if it’s only halfway through, the cost can be significant.

Pay Out the Mortgage

For homeowners looking to sell and exit the housing market — whether to rent, downsize, or relocate — the main concern is typically minimizing penalties from the mortgage broker.

The 3-month interest penalty is the most likely fee you’ll encounter, especially with a variable rate.

Selling in the last year of a fixed term may also help you avoid the steep IRD penalty, so timing can play a crucial role in how much of your money you get to keep.

Port the Mortgage

If you’re selling to buy a new property, you may be able to port your mortgage, transferring your current mortgage balance, rate, and term to your new home.

This can save you from penalty fees and help you avoid rising rates if the market has shifted since your original term.

Keep in mind, however, that you’ll need to qualify for the new loan and may need additional financing if your new home costs more.

Blend and Extend

In some cases, particularly if you’re buying again and want to secure current lower rates while keeping part of your existing mortgage, you may be able to use a “blend and extend” option. 

This combines your current rate with a new rate for a longer term, which can give you flexibility and potentially lower payments if rates have decreased.

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Selling with a Fixed-Rate vs. Variable-Rate Mortgage: Key Differences

When selling a property with a mortgage, the type of rate—fixed or variable—impacts the penalties and options available.

• Fixed-rate mortgages typically involve higher penalties and potentially IRD charges.

• Variable-rate mortgages typically offer lower, more predictable penalties.

Fixed-Rate Mortgages

Fixed-rate mortgages provide stability with locked-in payments, but breaking a fixed-rate term early can be costly.

Most Canadian lenders impose either a 3-month interest penalty or an Interest Rate Differential (IRD), whichever is higher. The IRD can be substantial if market rates have fallen since you locked in your rate.

If you’re buying again, porting your fixed-rate mortgage to a new property may be possible, letting you keep your existing rate and avoid penalties, though you’ll need to qualify for the new loan.

Example of 3-Month Interest Penalty (Fixed):
For a $500,000 mortgage at 4.75%, the 3-month penalty would be $5,937.50. If the IRD applies, the penalty could be higher, depending on your term length and the current rate difference.

Variable-Rate Mortgages

Variable-rate mortgages, on the other hand, offer more flexibility.

Breaking a variable-rate mortgage typically involves only the 3-month interest penalty, calculated at the lower variable rate, which often results in a smaller fee.

Porting options are available if you’re buying again, but market rate changes may make switching to a new mortgage attractive instead.

Example of 3-Month Interest Penalty (Variable):

With a $500,000 balance at 5.38% (RBC’s 5 Year variable rate in October 2024), the 3-month penalty would be $6,725.

Pros and Cons of Breaking the Mortgage Early

Breaking a mortgage early to sell your home comes with both advantages and disadvantages. Here’s what you need to consider when deciding whether to break your mortgage early in Canada:

Pros of Breaking a Mortgage Early

• Potential to Secure Lower Rates
  If interest rates have dropped significantly since you first secured your mortgage, breaking a higher fixed-rate mortgage to take advantage of the best mortgage rates could lead to long-term savings and a healthier financial situation.

• Access to a Home Equity Loan
  Selling your home with a mortgage allows you to access your Home Equity Line of Credit (HELOC), which can be used for a down payment on a new home or invested elsewhere. HELOCs let you borrow up to 65% of your home's value and are a common option for upsizers — especially after increasing the property value through renovations and improvements.

• Flexibility to Move
  If you need to relocate or have outgrown your current home, breaking your mortgage early allows you to sell and buy a new property sooner than waiting for your mortgage term to end.

• Porting Option
  For those who want to keep their existing mortgage terms, porting allows you to transfer your current rate and term to a new property, potentially avoiding penalties while retaining a favorable rate.

Cons of Breaking a Mortgage Early

• Penalties
  The biggest downside is the cost of penalties, especially for fixed-rate mortgages, which may incur either a 3-month interest penalty or an Interest Rate Differential (IRD) charge. 

• Administrative and Legal Fees
  Besides penalties, breaking a mortgage early may include administrative or legal fees which add to the overall cost of an early sale.

• Financial Qualification for Porting
  If you’re planning to port your mortgage to a new home, you must requalify based on the lender’s requirements for the new property. If you don’t qualify, you may be forced to pay out the mortgage, incurring penalties.

• Uncertainty with Rate Changes
  If you’re on a variable-rate mortgage, breaking it may mean losing the benefit of low rates if the market trends upward, making it potentially costly to secure a similar or better rate later.

Costs of Selling Your House With a Mortgage Contract

• Mortgage Penalties: If applicable, 3 months of interest or the IRD. On a $900,000 mortgage at a 4.5% interest rate, the 3-month interest penalty would be approximately $10,125 ($900,000 x 4.5% ÷ 4).

• Mortgage Discharge Fee: Mortgage lenders typically charge around $400 as a flat discharge fee, which should be written in your mortgage loan contract.

• Re-Appraisal: Lenders may require an appraisal if you’re porting or closing out the mortgage, which usually costs between $300 to $600.

• Real Estate Agent Commissions: Agent commissions are typically 3-6% of the sale price. For a $900,000 home, expect to pay between $27,000 and $54,000.

• Legal Fees: Legal fees are essential for handling the transfer of ownership, discharging the mortgage, and other administrative tasks. Usually between $1,000 and $2,000.

• Closing Costs: Potentially include property taxes, utilities, and adjustments for any unpaid bills. Depending on your location and the season, these can range between $500 and $2,000.

• Moving Expenses: If you are relocating, factor in the cost of moving. Local moves typically cost between $1,000 and $2,500, while long-distance relocations can reach $5,000 or more.

Learn more: The REAL Cost of Selling a House in BC

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