Is There a Penalty for Paying Out a Private Mortgage Early?
Most private mortgages carry a minimum interest guarantee, not a bank-style penalty. What you owe on an early payout is set entirely by your commitment letter, and that clause is negotiable before you sign it.
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Is there a penalty for paying out a private mortgage early?
Most private mortgages are not written with a bank-style penalty. Instead they carry a minimum interest guarantee, a promise that the lender earns interest for a set period even if you pay out sooner. The effect can feel identical to a penalty. What you owe depends entirely on the wording in your commitment letter, not a general industry rule.
Private lenders price a loan around the return they expect over the full term. When a private mortgage closes early, the lender still relies on that expected return to make the loan worthwhile. A minimum interest guarantee protects that expectation.
Do not think of the payout cost as a punishment. It is closer to a fee built into how the loan was priced from the start. The exact mechanic sits in the loan documents you signed, not in a standard schedule that applies across every private lender.
The citable fact: Private mortgages typically use a minimum interest guarantee rather than a bank-style penalty, and the amount owed on early payout is set entirely by the individual commitment letter.
What is a minimum interest guarantee?
A minimum interest guarantee promises the lender a set amount of interest income no matter when you pay out. Pay out early, and you owe the gap between interest already paid and that guaranteed amount. Private lenders fund deals around an expected return, not a posted rate sheet, and the clause is negotiated loan by loan.
Every private lender writes this clause differently. Some guarantee interest for the full term. Others guarantee a shorter window and allow payout after that without extra cost.
The citable fact: A minimum interest guarantee is a contract clause, not a fixed industry percentage, and its length and amount are set individually in each commitment letter.
Is a private mortgage open or closed?
Most private mortgages are written as closed terms, so early payout triggers a cost under the minimum interest guarantee. An open mortgage lets you pay out any time without that cost, but private lenders charge more for that flexibility and offer it less often. Which one you have is stated in the commitment letter.
Ontario private mortgages are arranged under rules administered by FSRA, and Alberta private mortgages fall under RECA. Neither regulator sets a standard term type. Read our overviews for private mortgage lending in Ontario and private mortgage lending in Alberta for the broader picture in each province.
| Term type | What it means | What to check in your commitment letter |
|---|---|---|
| Closed term | Payout before the guarantee period ends can trigger a minimum interest cost. | The length of the guarantee and how the makeup amount is calculated. |
| Open term | Payout is allowed at any time without a minimum interest cost. | Whether the flexibility carries a higher fee or rate, and whether it is offered at all. |
| Partial or staged open | Some lenders allow open payout after an initial closed period. | The exact date the closed period ends, and whether it is counted in calendar days or months. |
The citable fact: A private mortgage can be open or closed, and only the mortgage commitment itself confirms which one you signed.
How is a private payout different from a bank penalty calculation?
Banks calculate a fixed-rate penalty using an interest rate differential formula tied to posted rates and the remaining term, a calculation covered in detail elsewhere. Private lenders do not use that formula. They rely on the minimum interest guarantee written into your specific loan, so the two costs are not comparable and should not be estimated using bank rules.
The two systems solve different problems. A bank’s interest rate differential compensates the bank for the gap between your contract rate and current rates across a large, standardized book of loans. A private lender is usually one investor or a small group funding a single file, so the loan is priced and protected individually.
Do not use a bank penalty calculator to estimate what a private payout will cost. The numbers are built on different logic entirely. Read your own commitment letter for the real answer.
The citable fact: Bank penalties and private mortgage payout costs use entirely different formulas, so a bank penalty estimate cannot predict what a private lender will charge.
What does your commitment letter actually say about prepayment?
The commitment letter you signed is the only document that governs your prepayment cost. It should state whether the mortgage is open or closed, the length of any minimum interest guarantee, and how a payout amount is calculated. Any lender or broker fee must be disclosed to you in writing before you sign.
Ontario’s Mortgage Brokerages, Lenders and Administrators Act requires that written disclosure happen before you sign, not after. In Alberta, mortgage brokerages are licensed by RECA. Read the prepayment section of your commitment letter before signing, and ask your broker to explain any clause you do not fully understand.
| Clause to find | What to confirm |
|---|---|
| Term type | Whether the mortgage is open or closed, and for how long. |
| Minimum interest guarantee | Whether one applies, and what triggers the makeup payment. |
| Payout calculation method | How the lender calculates what you owe if you pay out early. |
| Fee disclosure | Confirm it is disclosed in writing. In Ontario that is required under the MBLAA; in Alberta, ask for it. |
| Renewal or extension terms | Whether the guarantee resets if the term is extended. |
The citable fact: No general rule sets a private mortgage payout cost. Your own commitment letter is the governing document, and Ontario and Alberta both require any lender or broker fee to be disclosed to you in writing before you sign.
Can you make lump sum payments during the term?
Some private mortgages allow lump sum payments toward the balance during the term, and some do not. Where allowed, a lump sum can still fall inside the minimum interest guarantee period and trigger a cost. Whether you have this right, and any limit on it, is set out in the commitment letter.
Do not assume a private mortgage works like a bank mortgage with an annual prepayment privilege built in as standard. That feature is common on prime lending, not private. Ask specifically about lump sum rights before you sign, and get the answer in writing.
The citable fact: Lump sum prepayment rights are not standard on private mortgages and exist only where the commitment letter grants them.
What happens if you sell the property mid-term?
Selling the property does not cancel the minimum interest guarantee. The mortgage still needs to be paid out at closing, and if the sale happens before the guarantee period ends, the same makeup interest can apply. Ask for a payout figure from the lender before you list the property, not after an offer is accepted.
A sale is still a payout in the eyes of the mortgage, whatever the reason behind it. Selling early does not create an exception to the terms you signed. Confirm the numbers with your lender or broker as early in the selling process as possible, since figures can take time to prepare.
The citable fact: Selling a property does not exempt a private mortgage from its minimum interest guarantee, so the payout cost still applies according to the commitment letter.
Can you negotiate the prepayment terms before you sign?
Yes. Prepayment terms in a private mortgage are negotiable before you sign, the same as the rate or the fee, and almost no borrower asks. A shorter minimum interest guarantee, a lump sum right, or an open option after a set point can all be requested at the commitment stage. Once you sign, the terms are fixed.
This is the point in the process where you have the most negotiating position, not the least. Once funds are advanced, the terms are locked. Before you sign, the lender still wants the deal to close and is often willing to adjust a clause that costs little on their side but matters to you.
Ask directly. Ask whether the minimum interest guarantee can be shortened, whether lump sum payments are allowed, and whether the loan can convert to open after a stated point. If the answer is no, ask why, and decide whether the term still fits your plan.
A broker who arranges private mortgages regularly knows which lenders in a given deal are flexible on these clauses and which are not. That knowledge is worth more before you sign than after.
The citable fact: Private mortgage prepayment terms are negotiable before signing, and the request itself, not just the answer, is the part most borrowers skip.
How does this change what the mortgage really costs you?
A private mortgage’s true cost is not just the fee and the rate you see upfront. It also includes what happens if your plans change and you need to pay out early. Factor the minimum interest guarantee into your decision the same way you factor in the rate and the fee.
Ask for the payout terms in writing before you compare offers, not after you have already chosen a lender. A slightly higher fee on one offer can be the cheaper choice overall if the prepayment terms are better. This is one of the details a broker checks when comparing private offers side by side, covered in more depth in our guide to comparing private mortgage offers.
Private mortgage rates run higher than bank rates for reasons tied to risk and funding source, not just cost padding, detailed in our explainer on why private mortgage rates are high. If the plan is to exit the private mortgage into a bank once your file improves, our guide on exiting a private mortgage to a lender walks through timing that move well.
The citable fact: The full cost of a private mortgage includes the fee, the rate, and the prepayment terms together, not the fee and rate alone.
What else do borrowers ask about private mortgages?
Prepayment terms are one piece of a larger decision. These related questions cover the rest of what to check before you sign a private mortgage.
- How do you compare private mortgage offers?
- Why are private mortgage rates high?
- How do you qualify for a bank after a private mortgage?
The full set lives on the Ask a Broker hub.
Frequently asked questions
Does every private mortgage have a minimum interest guarantee?
Not every one, but it is common in the private space. Whether yours does, and what it requires, is stated in your commitment letter. Ask your broker to point out the clause before you sign.
Is the prepayment cost the same as a bank’s interest rate differential?
No. Banks calculate a penalty using an interest rate differential formula tied to posted rates. Private lenders use a minimum interest guarantee instead, a different calculation entirely, so bank penalty tools do not apply.
Can a private mortgage be paid out with no extra cost at all?
Yes, if the mortgage is open, or if payout happens after any minimum interest guarantee period has passed. Confirm which situation applies to your loan in the commitment letter before assuming either way.
Who decides whether a private mortgage is open or closed?
The lender proposes the term when the deal is structured, and the borrower can negotiate it before signing. Once signed, the commitment letter is the record of what was agreed.
Does refinancing count as an early payout?
Yes. Replacing a private mortgage with a new loan, whether from another private lender or a bank, pays out the existing mortgage. The same minimum interest guarantee terms apply as they would for a sale.
What is MBLAA and why does it matter here?
The Mortgage Brokerages, Lenders and Administrators Act is Ontario’s governing legislation for mortgage brokering. It requires any lender or broker fee tied to your mortgage to be disclosed to you in writing before you sign, the same standard your prepayment terms should be documented under.
Does Alberta have the same disclosure requirement?
Alberta mortgage brokering is licensed and regulated by RECA, the Real Estate Council of Alberta. Ontario’s written fee disclosure requirement comes from the MBLAA, and no equivalent Alberta rule is stated here. Ask for the disclosure in writing either way, and check what your commitment letter sets out.
Should I ask about prepayment terms before or after I apply?
Before. Once you are far enough into the process that a commitment letter is issued, the terms on offer are close to final. Raise prepayment flexibility as a negotiating point early, at the same time you discuss the rate and the fee.
Is Pekoe’s chat a real person or an AI assistant?
A real licensed broker answers, live during business hours, and replies directly outside them. There is no AI persona standing in for an advisor on private mortgage questions.
Can a broker help me understand a payout clause I do not follow?
Yes, that is exactly what a broker is for. Bring the commitment letter and ask specifically about the prepayment section before you sign, not after.
Does a shorter private mortgage term reduce the prepayment risk?
A shorter overall term can reduce how long a minimum interest guarantee applies, but it depends entirely on how the specific clause is written. Some guarantees run for the full term regardless of length, so ask rather than assume.
What should I do if I think I will sell or refinance soon?
Say so upfront, before the commitment letter is drafted. Lenders and brokers can structure the prepayment terms differently when they know your timeline in advance, rather than after you have already committed to less flexible terms.
Confirm Your Prepayment Terms Before You Sign
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