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A bona fide sales clause is a mortgage restriction that ties the borrower to the lender for the full term, allowing early discharge only if the property is sold in a genuine, arm's-length sale — not through a refinance, private transfer, or sale to a related party.
Most closed mortgages can be paid out early for a prepayment penalty — the greater of three months' interest or the interest rate differential. A mortgage carrying a bona fide sales clause removes that option: the borrower can't simply pay the penalty and refinance or switch lenders during the term. The only way out before maturity is an actual arm's-length sale of the property at fair market value.
Lenders sometimes offer this clause in exchange for a modest rate discount, since it guarantees the loan stays on their books for the full term unless the home is sold. For a broker, that trade-off matters most for clients who might want to refinance, consolidate debt, or switch lenders before maturity — a bona fide sales clause takes that flexibility off the table until the property changes hands.
Not the standard Canadian mortgage: most Canadian closed mortgages allow early discharge for a prepayment penalty at any time; a bona fide sales clause is a specific, less common product feature that must be flagged before the client signs.
Arm's-length sale only: the exit requires selling to an unrelated buyer at market value — a transfer to a family member or a related entity generally won't qualify as a bona fide sale.
Distinct from a due-on-sale clause: unlike the acceleration clause common in some other countries, a Canadian bona fide sales clause restricts early discharge rather than automatically demanding repayment in full when title changes.
Disclosure matters: provincial mortgage brokering rules require brokers to make sure clients understand unusual restrictions like this one before committing to a mortgage product.
Definitions reflect Canadian federal and provincial rules as of the “Updated” date above. Not advice for any specific file.
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