The client
A homeowner in Camrose was six years into a private mortgage carrying a $138,000 balance at 8.75% -- a contract that, on its own written terms, was closed for its entire term with no prepayment option of any kind.
Private mortgage balance
$138,000
8.75%, 6 years into the term
Contract terms
No prepayment permitted
In writing, for the full stated term
Household income
$6,800/month
Other debt
$215/mo car loan
The problem
A private lender's mortgage contract can say whatever the two parties agree to -- but a private mortgage is still a mortgage on real property, and federal law places one hard limit on how long any such contract can actually keep an individual borrower locked in.
What the contract said, and what the statute said instead
- ▸The contract's own written terms: closed for the entire term, no prepayment option of any kind
- ▸Interest Act (Canada) s.10: an individual borrower may prepay any mortgage with a term of 5 years or more in full, any time after year 5, for a penalty capped at 3 months' interest
- ▸This mortgage was given by a natural person, carried a term over 5 years, and was already 6 years in -- every condition the statute requires was met
The contract's own words were not wrong, exactly. They were simply overridden by a federal statute the private lender's own lawyer had not accounted for.
The numbers
Once the statutory right applied, the cost of exiting was fixed by formula, not by negotiation -- the same monthly interest-only figure the private mortgage had always carried, just multiplied by three.
| The statutory prepayment bonus | Amount |
|---|---|
| Private mortgage balance | $138,000 |
| Monthly interest at 8.75% | $1,006 |
| 3 months' interest (the statutory bonus) | $3,018 |
| New A-lender refinance | Figure |
|---|---|
| Qualifying payment at the qualifying rate (7.15%), 22 years | $1,030/mo |
| Property tax + heat | $340 |
| Total debt service | 23.3% |
23.3% leaves considerable room, in line with how lender-type market share data shows a straightforward A-lender refinance typically performs once a private exit is actually completed.
The solution
A mortgage associate licensed under Alberta's Real Estate Act, working with the borrower's own lawyer, treated the contract's no-prepayment clause as a starting position to be tested against the statute, not the final word.
First, confirmed the mortgage met every condition Interest Act s.10 requires: a natural-person borrower, a term of 5 years or more, and more than 5 years already elapsed.
Second, the borrower's lawyer cited s.10 directly to the private lender's own counsel, who initially quoted a payout based on the contract's no-prepayment clause alone.
Third, obtained a revised payout statement reflecting the statutory 3-months'-interest bonus in place of the private lender's original refusal to quote a payout at all.
The outcome
The private mortgage was repaid in full for the $3,018 statutory bonus, the new A-lender refinance funded at 5.15%, and total debt service settled at 23.3%.
This file is uninsured and involves no purchase or land transfer, so there is no CMHC ratio ceiling and no Alberta closing-cost figure at stake; the 23.3% figure is informational.
What to take from this file
- 01Interest Act s.10 gives an individual borrower a statutory right to prepay any mortgage over 5 years old in full, for a 3-months'-interest bonus -- regardless of what a private contract says. Check the mortgage's age and the borrower's status before accepting a lender's no-prepayment position.
- 02The statute applies to mortgages given by a natural person; it does not apply the same way to a corporate borrower. Confirm who actually signed as mortgagor before relying on it.
- 03The 3-months'-interest formula is fixed by federal statute, but the dollar amount it produces depends entirely on the loan's own rate and balance. Calculate it for the specific file; don't assume a prior file's figure.
- 04A private lender's own contract language does not override federal law. A written no-prepayment clause is a starting position to test, not necessarily the final word.
Sources
Every regulatory figure in this file traces to one of these primary sources. Client details and anything that varies by lender are illustrative, as flagged below.
- ▸OSFI — Minimum qualifying rate for uninsured mortgages — the minimum qualifying rate — greater of contract rate + 2% or 5.25%.
- ▸Provincial/territorial mortgage-broker legislation fetched directly (bclaws.gov.bc.ca, legisquebec.gouv.qc.ca, fcaa.gov.sk.ca, web2.gov.mb.ca, nslegislature.ca, assembly.nl.ca) plus FCNB's own site for NB and CanLII's index for PE — see notes for per-province method — provincial mortgage regulators and licence titles.
Illustrative in this file — lender-specific, not rules:
- ▸8.75% / 5.15% rates — rates move daily; neither is a quote.
- ▸the exact statutory bonus dollar figure — the 3-months'-interest formula is fixed by federal statute, but the dollar amount it produces depends entirely on this loan's own rate and balance.
- ▸the TDS figure — this file is uninsured and involves no purchase, so there is no CMHC ratio ceiling -- the number is informational.
Authority & provenance
How this case file was built
We publish the origin, the verification method and the reviewer for every case file, so you can judge how far to trust it before you rely on it with a client.
Where it comes from
Derived from files handled by Treadstone’s fulfillment desk and from scenarios contributed by partner brokerages. Names, employers, exact amounts and dates are changed so no client or file is identifiable.
Provenance: Composite — a pattern seen repeatedly on fulfilled files, not a single transaction.
What is verified
Every regulatory figure traces to a primary source listed above and was checked against it on the date shown. The arithmetic is recomputed by machine on every rebuild.
Anything that varies by lender is labelled illustrative rather than stated as a rule.
Who reviewed it
Reviewed for Canadian regulatory accuracy before publication, and re-checked whenever a cited rule changes.
Reviewed by: Nicholas Parson, Treadstone Associates — reviews every case file before publication.
This case file is professional reference material for licensed mortgage professionals. It is not advice to a borrower, and it is not a lender commitment. Insurer rules, qualifying rates and provincial taxes change — confirm the current position with the insurer, regulator or lender before you rely on any figure here in a live file.