Last updated: September 2026
TL;DR:
Most Ontario mortgages let you pay extra toward your principal each year without a penalty — these are called prepayment privileges. If you break your mortgage early or pay more than your privileges allow, your lender will usually charge a prepayment penalty. The penalty calculation is different for fixed-rate and variable-rate mortgages. If you are taking a private mortgage, your lender will want to see a clear exit strategy — a plan for how you will pay out or refinance the loan before the term ends.
What are mortgage prepayment privileges?
Direct answer: Prepayment privileges are the extras your lender allows you to put toward your mortgage principal each year without charging a penalty. They usually come in two forms: lump-sum payments and increases to your regular payments.
Your mortgage contract sets your payments, term, rate — and how much extra you may pay. That extra is your prepayment privilege.
The most common privilege is the annual lump-sum payment: a one-time payment against your principal, usually a percentage of your original balance. Check your mortgage documents for your exact percentage.
The second common privilege is the payment increase. You can raise your regular payment by a set percentage. This is usually offered once per year as well. Even a small increase adds up over time because more of each payment goes toward principal.
Some contracts also allow doubled-up payments or extra payments on set dates — but privileges only cover extra payments within your contract’s limits. Go beyond them and a penalty may apply.
If you want a rough idea of how extra payments change your balance, run the numbers on my mortgage calculator.
How are prepayment penalties calculated for fixed-rate mortgages?
Direct answer: For fixed-rate mortgages, the penalty is usually the greater of two amounts: a few months of interest, or an “interest rate differential” calculation that compares your current rate with the lender’s current rate for the remaining term.
Three months of interest. The lender takes your current mortgage balance and calculates roughly three months of interest on it. That gives one number.
Interest rate differential (IRD). The lender looks at the rate on your existing mortgage and compares it with the rate it would charge today for a mortgage with a similar remaining term. If today’s rate is lower than your rate, the lender calculates the difference and applies it over the rest of your term. That gives a second number.
The lender charges the higher of the two — and when rates have dropped a lot since you signed, the IRD number is often much higher.
This matters most when breaking your mortgage early to refinance or sell: the penalty becomes part of your cost, so always get the exact amount from your lender in writing before you commit.
How are prepayment penalties calculated for variable-rate mortgages?
Direct answer: For variable-rate mortgages, the penalty is usually just three months of interest on your current balance. There is no interest rate differential calculation.
This makes the variable-rate penalty simpler and often smaller than the fixed-rate penalty. Three months of interest is a straightforward number: the lender takes your current balance, applies your current rate, and calculates what about three months of interest comes to.
That said, “usually” is not “always.” Your contract controls. Read it before you assume anything. And remember: even a smaller penalty is still real money, so get the exact figure in writing before you break a mortgage.
If you are comparing refinance options, the mortgage renewals and refinancing page walks through how I help Ontario borrowers weigh penalty costs against the savings of a new mortgage.
Why does an exit strategy matter so much for a private mortgage?
Direct answer: Private lenders offer short terms, usually one to three years, and they want to know how the loan gets repaid before the term ends. A clear exit strategy — selling, refinancing with a bank or alternative lender, or another planned payout — is often a condition of getting approved.
A private mortgage is usually a bridge, not a destination. It solves a problem today: a purchase that needs to close fast, a refinance the bank declined, funds needed between a sale and a new purchase, or time to repair credit. The private lender’s question is always the same: how does this loan end?
That is your exit strategy. Here are the most common ones in Ontario:
- Refinance with an institutional lender. The most common exit. You take the private mortgage now, improve your situation during the term — steady income, better credit, more equity — and move to a bank or alternative lender at maturity.
- Sell the property. If the plan is to sell within the term, the sale proceeds pay out the private mortgage. This is common for bridge situations and properties that will be listed soon.
- Another planned payout. An inheritance, a business sale, or another expected sum can be the exit, as long as it is realistic and timed to the term.
Whatever your plan is, say it clearly when you apply. Lenders look for a plan that is realistic, timed to the term, and supported by your documents. A vague plan — “I will figure it out” — is the fastest way to a declined application.
This applies even more to private mortgages, where the lender is an individual or private company rather than a bank. If you want the full picture of how private lending works in Ontario, including the rules lenders must follow, read the private mortgage rules in Ontario guide.
How can I reduce my prepayment penalty?
Direct answer: Stay within your prepayment privileges, time the payout close to your renewal date, and ask your lender about options like a blended rate before you break the mortgage.
Here are practical steps:
- Use your privileges first. Make your allowed lump-sum payments and payment increases. Every dollar of principal you pay down reduces the balance a penalty is calculated on.
- Time it near maturity. If you are close to the end of your term, waiting until renewal may eliminate the penalty entirely. A few months of patience can save a lot of money.
- Ask about porting or blending. If you are selling and buying at the same time, some lenders let you move (port) your mortgage to the new property. Some offer a blended rate — a mix of your old rate and today’s rate — so you do not have to break the contract.
- Get the penalty in writing. Before you sign anything new, ask your current lender for the exact payout figure. Compare it with what the new mortgage saves you. Sometimes paying the penalty is worth it. Sometimes it is not. The numbers decide.
Frequently Asked Questions
Can I make extra payments on my mortgage without a penalty?
Yes, within your prepayment privileges. Your contract sets how much extra you can pay each year — usually a lump-sum percentage and an allowed payment increase. Extra payments beyond those limits can trigger a penalty.
How much is a prepayment penalty on a fixed-rate mortgage?
It is usually the greater of a few months of interest or an interest rate differential calculation. The exact amount depends on your balance, your rate, current rates, and the time left in your term. Ask your lender for the figure in writing.
How much is a prepayment penalty on a variable-rate mortgage?
Usually about three months of interest on your current balance. There is no interest rate differential calculation. Check your contract to confirm, because the contract always controls.
What is an exit strategy for a private mortgage?
It is your plan for repaying the private mortgage before the term ends. The most common exits are refinancing with a bank or alternative lender, selling the property, or another planned payout. Private lenders usually want to see this plan before they approve the loan.
Do I need an exit strategy for a regular bank mortgage?
Not in the same way. Bank mortgages are built for the long term, and you renew at the end of each term. Exit strategies matter most when the loan is short-term by design — which is exactly how private mortgages work.
Talk to Kia about your Ontario mortgage
Thinking about paying out early, refinancing, or using a private mortgage as a bridge? I will look at your contract, calculate the real penalty cost, and help you plan a clean exit.
Kia Pakravan, FSRA Licence #13380 — licensed in Ontario
Phone: (416) 716-9696
12930 Yonge Street, Richmond Hill, ON