Most people with an alternative or private mortgage didn't plan to have one. A few years of self-employment income that doesn't look tidy on paper, a bruised credit report after a separation, a renovation that needed money faster than a bank could approve it, a home that's hard to value. These lenders exist for exactly those situations, and they fill a real gap.
They're also usually meant to be a bridge. The terms are short, the rates are higher, and the plan, often from the first day, is to move back to a mainstream lender once the file looks stronger. This post is about that move: what it costs to leave early, how these penalties differ from a bank's, and why the timing matters more here than almost anywhere else.
Two kinds of lender, two kinds of penalty
Alternative lenders, sometimes called "B" lenders, are regulated institutions such as Home Trust, Equitable Bank, Haventree Bank, Bridgewater Bank and trust companies like Community Trust. They lend on more flexible terms than the big banks, and in 2026 their rates typically run about one to three percentage points above prime lenders. Terms are usually one or two years, sometimes three, and a lender fee of around 1% at signing and again at renewal is common.
Private lenders and mortgage investment corporations (MICs) are individuals, companies, or pooled funds that invest in mortgages. The Financial Services Regulatory Authority of Ontario (FSRA) describes their terms as ones that "can vary significantly." Brokers' published figures for 2026 put first mortgages at roughly 8% to 12% and second mortgages at roughly 10% to 15%, usually interest-only, on terms of six to twelve months. A lender fee of 1% to 4% and a broker fee of 1% to 2% are typical, and similar fees often come back at renewal.
How an alternative lender works out the penalty
For a closed fixed term, almost every alternative lender charges the greater of three months' interest or an interest rate differential (IRD). That part looks like a bank. The difference is what the IRD is measured against.
A big bank usually compares your rate with its posted rate, less the discount you got when you signed. Many alternative lenders instead compare with what they'd lend at today. Home Trust's broker materials describe the IRD as the gap between your rate and "the lowest advertised rate in effect on the prepayment date." EQ Bank describes it as the rate it "can now charge when re-lending the funds." Haventree uses its "then current reinvestment rate."
Not all of them do it that way. Bridgewater Bank's alternative mortgages measure against Government of Canada treasury bill and bond yields, which sit well below mortgage rates and produce a much larger IRD. Community Trust uses its posted rate less a flat 1%. Some lenders also charge a discharge, statement or reinvestment fee on payout; Community Trust lists $300 and $100.
One more detail worth knowing. Home Trust's standard charge terms for Ontario allow a full early payout only "upon the closing of a bona fide arms-length sale" of the home, or after year three of a longer term. On a mortgage with that clause, refinancing away mid-term may not be an option at all, whatever the penalty.
How a private lender or MIC works out the penalty
There is no standard. The most common pattern in brokers' descriptions is a flat three months' interest. Some private mortgages are open and can be repaid without a charge; others are closed to maturity, meaning the remaining interest is owed if you leave early. Because the term is short, the penalty can't sensibly be more than the interest left to run, and our calculator caps it there.
There's no Ontario rule that limits how many months of interest a private lender can charge on a voluntary payout. The hard ceiling is the federal criminal rate of interest, 35% APR since January 2025, which counts fees as interest.
The usual path back
The common case is simple: the term ends, you've rebuilt what needed rebuilding, and a mainstream lender takes over the mortgage. At maturity there's no prepayment penalty. There may be a discharge fee and the new lender's legal and appraisal costs, but nothing like an IRD.
Leaving before maturity is where the arithmetic gets interesting, because the lower rate has only a few months to earn back the penalty.
Why waiting is often the cheaper path
Here are two illustrative scenarios, run through the same engine as our break calculator. Both assume a move to a mainstream rate of about 4%, in line with our September estimates, and they leave out the new lender's legal and appraisal costs.
Aisha has a mortgage with an alternative lender that measures the IRD against its current rate: $480,000 originally, at 6.49% for two years, with 13 months left. Her lender's current rate is 6.29%, so the IRD is small, about $1,000, and three months' interest of about $7,600 applies instead. With a $400 discharge fee, leaving costs an estimated $8,000.
| Aisha, alternative lender | Estimated result |
|---|---|
| 13 months left, IRD against the lender's current rate | Breaking comes out about $4,500 ahead |
| 13 months left, IRD against an illustrative 2.9% bond yield | Breaking comes out about $6,300 behind |
| 4 months left, lender's current rate | Breaking comes out about $4,100 behind |
The first row is the one that surprises people: with a year to go, the gap between 6.49% and 4% can outrun three months' interest. The second shows how much the lender's method matters. The same mortgage, measured against a bond yield, has an estimated IRD of about $18,500. The third is the timing point. With four months left, the penalty barely changes but the months of lower interest mostly disappear.
Daniel has a private first mortgage of $300,000 at 9.99% on a 12-month term, with five months left. His commitment letter says three months' interest, plus a $500 discharge fee.
| Daniel, private lender, five months left | Estimated cost to leave | Estimated result of breaking |
|---|---|---|
| Open term | $500 | About $6,800 ahead |
| Three months' interest | About $7,800 | About $600 behind, roughly even |
| Closed to maturity | About $12,700 | About $5,400 behind |
With three months' interest and five months to go, the lower rate earns back the penalty almost exactly. With nine months left the same charge would leave him an estimated $5,300 ahead; with two months left, about $2,500 behind. On short terms, the number of months remaining often decides the answer more than the rate does. The figures barely change if the payments are interest-only.
None of this means leaving early is right or wrong for Aisha or Daniel. It means the answer depends on three things they can look up: the months left, how the contract calculates the charge, and the fees. A private renewal fee of 1% to 3% can also change the picture if the plan is to extend rather than leave.
What to read before deciding
In Ontario, a mortgage brokerage must give you a cost-of-borrowing disclosure at least two business days before you commit. It shows the annual percentage rate including fees, along with the prepayment terms. If a private mortgage is renewing on a set date, a fresh disclosure is due at least 21 days before. FSRA's private mortgage page suggests asking whether there are prepayment penalties, how they're calculated, and what discharge, admin and renewal fees apply.
In the end, the commitment letter and your mortgage terms govern. Practice varies by lender, sometimes by product, and the figures here are estimates built on published terms. You may wish to confirm the exact charge with a payout statement from your lender.
If you'd like to see your own numbers, the break calculator now has options for an alternative lender or trust company and for a private lender or MIC, with a field for discharge fees. And if you'd rather talk it through with a licensed mortgage professional, you can book a conversation.
People in this post are illustrative composites. Rates, terms and fees are typical of what was published in Canada in September 2026 and vary by lender and by contract. All figures are estimates. This is general information, not advice about your situation, and nothing here is a recommendation.