The short answer
Your contract determines the charge. A closed mortgage may carry a prepayment penalty; an open mortgage generally permits early repayment without one. Ask your lender for a dated calculation, not just an online estimate.
Government of Canada: mortgage prepayment penaltiesInterest calculation
One common comparison used in penalty calculations.
Interest rate differential
A contract-specific comparison of interest amounts.
The quote matters
Balances, remaining term and rates can change the result.
The basics
Why breaking a mortgage costs money
A mortgage term is a contract for a set period at an agreed rate. The Government of Canada calls renegotiating it before the term ends breaking your mortgage contract. It happens when you sell, refinance or move to another lender mid-term.
With a closed mortgage, the lender can charge a prepayment penalty for paying early. With an open mortgage, the Government of Canada says you can make a prepayment or lump-sum payment without a penalty.
The Government of Canada says the penalty is typically the higher of two amounts: three months’ interest on what you still owe, or the interest rate differential (IRD). The IRD compares the interest at your rate with the interest at a current comparable rate for the rest of your term.
Why it matters
The penalty can change the whole plan
The Government of Canada says the IRD applies when your mortgage rate is higher than current rates. If rates have fallen since you signed, the IRD can be far larger than three months’ interest. A refinance that looks cheaper each month may cost more once the penalty is counted.
Federally regulated lenders must give you an information box at the start of your mortgage agreement. The Government of Canada says it shows your prepayment privileges and penalties and explains how they are calculated. Find that box before you call your lender.
How it works
Check your penalty before you commit
Find your information box
Look at the start of your mortgage agreement for prepayment privileges, penalties and the calculation method.
Confirm open or closed
If it is open, the Government of Canada says you can prepay without a penalty. If it is closed, keep going.
Ask for a dated payout quote
Request the exact penalty for a specific date. Your balance, the time left and current rates all move, so an old quote can be wrong.
Use this year’s prepayment privileges
These let you raise payments or make lump sums up to a limit. The Government of Canada says most lenders cap them each year and do not carry unused amounts forward. Penalties are then based on a lower balance.
Ask about porting
Porting means taking your rate, terms and conditions to your next home. The Government of Canada says it saves you from breaking the contract. Ask what conditions and deadlines apply.
Ask about blend-and-extend
Some lenders let you renew early at a rate that blends your old and new rates. The Government of Canada says there is no prepayment penalty with this option, though administrative fees may apply.
Avoid these
Penalty mistakes that cost the most
Treating an online estimate as the answer
Contract terms decide the method, including how discounts and comparison rates are used. Only your lender’s written quote counts.
Forgetting the other fees
The Government of Canada lists administration, appraisal, reinvestment and discharge fees, plus repaying any cash-back you received. Ask for each line separately.
Setting completion before getting a quote
A sale contract fixes your payout date. Get the penalty first so your selling-cost plan uses a real number.
Comparing monthly payments only
A lower payment after refinancing can hide a large penalty and new fees. Compare total cost over the same period.
Example
Three months’ interest vs. a simplified IRD
Illustration only, with round assumed numbers. Real IRD methods are set by each contract and can differ.
| Assumed balance owing | $400,000 |
|---|---|
| Assumed contract rate | 5% |
| Three months’ interest: $400,000 × 5% × 3 ÷ 12 | $5,000 |
| Assumed current comparison rate | 3% |
| Assumed time left in term | 2 years |
| Simplified IRD: $400,000 × (5% − 3%) × 2 | $16,000 |
| Penalty if the higher amount applies | $16,000 |
Simplified to show why the IRD grows when rates fall. Lenders may use posted rates, discounts and exact days, so your figure will differ.
Questions to ask
Get these answers in writing
Your current lender
- Which method applies: three months’ interest, the IRD, or the higher of the two?
- Which comparison rate do you use, and how is my original discount treated?
- How much unused prepayment privilege do I have this year?
- Can I port or blend-and-extend this mortgage?
Your mortgage broker
- What is the total cost of switching, including the penalty and every fee?
- How many months until the interest savings cover that cost?
- Would waiting until my term ends cost less overall?
Your lawyer or notary
- Will you pay my lender directly from the sale funds?
- What happens to the payout if completion moves?
FAQ
Common questions
How is a mortgage prepayment penalty calculated in Canada?
The Government of Canada says it is typically the higher of three months’ interest on your balance or the IRD. Your contract sets the exact method. Ask your lender to show the calculation in writing for a specific date.
Why is my IRD so much higher than three months’ interest?
The IRD applies when your rate is above current rates. A bigger rate gap and more time left both make it larger, as the worked example above shows.
Do I pay a penalty on an open mortgage?
The Government of Canada says an open mortgage lets you make a prepayment or lump-sum payment without a penalty. Check your contract for any separate administration or discharge fees.
Can I avoid the penalty when I sell my home?
Ask your lender about porting the mortgage to your next home, and compare the timing of your sale with your term’s end date. The Government of Canada suggests both as ways to reduce or avoid the charge.
Is refinancing for a lower rate worth the penalty?
Add the penalty and all fees, then compare that with the interest you would save over the same period. Our mortgage payment calculator helps you compare the payments.
