How Mortgage Prepayment Penalties Are Calculated in Canada (2026)

If you break your mortgage before the term ends — to refinance, sell, or move lenders — you'll usually pay a prepayment penalty. On a variable mortgage it's modest and predictable; on a fixed mortgage it can run into many thousands of dollars and catch people completely off guard. Here's exactly how it's calculated.

The short answer

For a variable-rate mortgage, the penalty is typically three months' interest. For a fixed-rate mortgage, it's the greater of three months' interest or the interest rate differential (IRD) — and the IRD can be large, especially early in the term or after rates have fallen. Always get your exact figure from the lender before deciding to break. Estimate it with the calculator.

Variable-rate penalty: three months' interest

Simple and small. The lender calculates roughly three months of interest on your current balance at your rate. On a $400,000 balance at 5%, that's about $5,000 — and often less. This predictability is one of variable's advantages if you might break early.

Fixed-rate penalty: the greater of two numbers

Three months' interest

Calculated the same way as above.

Interest rate differential (IRD)

Roughly, the interest the lender loses for the rest of your term because rates have changed. In simple terms: the difference between your rate and the rate the lender could now charge for the remaining term, applied to your balance over the months left. The bigger the rate drop since you signed — and the more term remaining — the larger the IRD. You pay whichever is greater, three months' interest or the IRD.

Watch the comparison rate. Many big banks use a posted-rate method: they take their current posted rate for your remaining term and subtract the discount you received when you signed. That produces a lower comparison rate, a wider gap and a larger penalty. Many monoline lenders instead compare your rate with their actual current rate for the remaining term, which is usually smaller. How your lender defines this is in your mortgage contract.

A simple example

Say you have $400,000 left, three years remaining on a fixed term, and rates have dropped about 1% since you signed. A rough IRD is 1% × $400,000 × 3 years ≈ $12,000 — far more than the ~$5,000 three-months-interest figure, so you'd pay the IRD. The same mortgage with only three months left would owe roughly three months' interest instead. Time remaining and rate movement drive everything.

How to reduce or avoid the penalty

• Use your annual prepayment privileges first (often 15–20% penalty-free) to shrink the balance the penalty is based on.
• Wait until renewal — at term-end there's no penalty. See what happens at renewal.
• Port your mortgage if you're moving, carrying the rate to the new home.
• Blend-and-extend — some lenders blend your rate with a new one instead of a hard break.

Whether breaking is worth it comes down to penalty vs. benefit — walk through it in should you break your mortgage to refinance.

Frequently asked questions

How is a mortgage prepayment penalty calculated in Canada?

Variable mortgages: about three months' interest. Fixed mortgages: the greater of three months' interest or the interest rate differential (IRD), which reflects the lender's lost interest for the remaining term.

Why is my fixed-mortgage penalty so high?

Because the IRD grows when rates have fallen since you signed and when more term remains. Lenders that use a posted-rate method also subtract your original discount from their current posted rate, which lowers the comparison rate and makes the IRD larger.

Can I avoid the penalty?

Yes — wait until renewal (no penalty at term-end), port your mortgage if moving, use annual prepayment privileges, or ask about a blend-and-extend.

What is the interest rate differential (IRD)?

A penalty approximating the interest your lender loses over the rest of your term when you break a fixed mortgage early. It's the figure that makes fixed penalties large.

Thinking of breaking your mortgage? Talk to us or estimate your penalty — we'll get the exact number and tell you whether breaking beats waiting.