The client
A Sarnia homeowner has a private first mortgage with five months left before maturity. Rates have eased since the file was placed, and an A-lender is now willing to take the borrower out at a materially lower rate — the only question left was whether to pay to exit today or wait out the remaining term.
Private mortgage balance
$340,000
9.99% interest-only, negotiated per file
Home value
$500,000
68% LTV against the private balance
Time to maturity
5 months
On the current private term
A-lender offer
5.49% fixed
25-year amortization, illustrative
Household income
7,800/mo
Existing line-of-credit payment 180/mo
The problem
The private lender’s mortgage carries a prepayment penalty for a discharge before term — three months’ interest, a common private-lending convention though never a universal one. The client’s first instinct was to treat the penalty as a simple cost to avoid by waiting; the real comparison needed both paths priced in full, not just the penalty line by itself.
What the penalty actually costs
- ▸Interest-only payment at 9.99%: 2,830/mo
- ▸Discharge penalty (three months’ interest): $8,490
Every private lender and every mortgage negotiates its own penalty terms — the mechanics here are illustrative of a common structure, not a fixed rule that applies to every private file.
The numbers
Two paths, priced over the same five-month window: pay the penalty and refinance today, or hold to term and refinance penalty-free at maturity.
| Option A — pay out today | Amount |
|---|---|
| Discharge penalty (one-time) | $8,490 |
| A-lender payment × 5 months (2,073/mo) | $10,365 |
| Total cash outlay, five months | $18,855 |
Option B — hold to term
| Hold to term | Amount |
|---|---|
| Interest-only payment × 5 months (2,830/mo) | $14,150 |
| Total cash outlay, five months | $14,150 |
Option B costs $4,705 less in pure cash outflow over the five-month window — but every dollar of it is interest-only, with zero principal reduction. Option A’s 2,073/mo payments begin amortizing the balance immediately, so part of that higher outlay converts directly into equity rather than disappearing as interest.
Qualifying for the A-lender exit, either way
| Ratio | Figure |
|---|---|
| Qualifying rate | 7.49% |
| Payment at the qualifying rate | 2,485 |
| GDS | 37.6% |
| TDS vs. the 44% benchmark | 39.9% ✓ |
The solution
Rather than defaulting to whichever path felt cheaper on the penalty line alone, the mortgage agent priced both paths over the same window and put the trade-off in front of the client explicitly.
Confirmed the A-lender exit qualifies today at the qualifying rate on the full private balance, removing timing pressure from the decision — the client was never at risk of being stuck with the private lender past maturity regardless of which path they chose.
Laid out the cash-versus-equity trade-off in dollars, not just as a penalty to avoid, so the client could weigh the five-month cash saving against the principal reduction they would give up by waiting.
The outcome
The client chose to hold to term, banking the $4,705 five-month cash saving and refinancing penalty-free once the private mortgage matured — a reasonable call given their cash-flow priorities, though a client wanting to start building equity sooner could just as defensibly have paid the $8,490 penalty and moved today. Both numbers were on the table before the decision was made.
What to take from this file
- 01Price both exit paths in full dollars, not just the penalty line. A discharge penalty looks like the whole cost until it’s compared against the alternative’s own carrying cost.
- 02Cash outflow and equity built are two different measures. The cheaper cash path here builds zero equity; the more expensive one builds some.
- 03Private penalty terms are negotiated per file. Three months’ interest is a common convention, not a rule every private lender follows.
- 04Confirm the A-lender exit qualifies before the timing decision, not after. Removing qualification risk from the equation lets the client choose on cost alone.
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%.
- ▸CMHC — CMHC Reviews Underwriting Criteria — GDS 39% / TDS 44% maximums and the 600 credit-score floor for insured files.
- ▸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:
- ▸9.99% private rate and a three-months’-interest discharge penalty — private pricing and penalty terms are negotiated per file.
- ▸5.49% A-lender rate — rates move daily; not a quote.
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.