Mortgage Penalty Calculator

How Mortgage Prepayment Penalties Work in Canada

Breaking a mortgage before the term ends triggers a prepayment penalty. For fixed-rate mortgages, the penalty is the greater of two calculations: three months’ interest on your current balance, or the Interest Rate Differential (IRD). The IRD compensates the lender for the interest revenue they lose when you pay off the mortgage early and reinvest at a lower rate. For variable-rate mortgages, the penalty is almost always just three months’ interest, making them far cheaper to break. This is a key consideration when choosing between fixed and variable at the start of your term.

The IRD calculation varies significantly between lenders, and this is where penalties can become surprisingly large. Big banks typically calculate IRD using their posted rates (which include a built-in discount), resulting in a larger rate differential and therefore a bigger penalty. Monoline lenders and credit unions often use the contract rate, which tends to produce a smaller IRD. On a $400,000 mortgage with 3 years remaining, the penalty difference between calculation methods can exceed $10,000. Always ask your lender for the exact IRD calculation formula before signing a fixed-rate mortgage.

Penalty Comparison: Fixed vs Variable ($400,000 balance)

Before breaking your mortgage, calculate whether the interest savings from a lower rate actually exceed the penalty. For example, if refinancing saves you $300/month but the penalty is $15,000, the breakeven point is 50 months — which may exceed the time until your next renewal anyway. Some situations justify paying the penalty: selling your home, a significant life change, or a dramatic rate drop. Porting your mortgage (transferring it to a new property) is another option that avoids the penalty entirely, though not all mortgages are portable and the terms may be restrictive. Credit unions and monoline lenders generally offer more favourable penalty structures than the big banks.