Mortgage prepayment penalty estimator.
Most fixed mortgages charge the GREATER of three months' interest or the Interest Rate Differential (IRD). Variable mortgages typically charge three months' interest only.
To break a fixed mortgage you pay the greater of three months' interest or the IRD; variable mortgages charge only three months' interest. The IRD's size depends on the comparison rate — Big-6 banks use posted-rate IRD (often five figures), while monolines use a far smaller fair IRD on the same balance. Enter your balance, rate and months left above.
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Which penalty applies?
Fixed mortgages charge the greater of these two — the highlighted bar is your penalty.
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How prepayment penalties work in Canada
When you break a closed mortgage before the end of its term — to sell, refinance, or move to a cheaper rate — the lender charges a prepayment penalty to compensate for the interest it expected to earn. On a fixed mortgage the penalty is the greater of two figures: three months’ interest on your balance, or the Interest Rate Differential (IRD). On a variable mortgage it is almost always just three months’ interest, which is the main reason variable holders pay so much less to break. Three months’ interest is simple arithmetic — roughly your balance times your rate, divided by four. The IRD is the part that surprises people, and it is calculated as your balance multiplied by the gap between your contract rate and a comparison rate, prorated over the months left in your term.
What drives the IRD number
The single biggest factor is which comparison rate the lender plugs in. Big-6 banks use a posted-rate method, comparing against an inflated posted rate, which widens the differential and can balloon the penalty into five figures. Monolines and many credit unions use a fair-IRD method tied to today’s discounted rates, producing a far smaller number on an identical balance. After that, two things matter: the size of the rate gap, and how many months remain. Because IRD scales with the time left, it is largest early in a term and shrinks toward maturity — and at some point three months’ interest becomes the bigger of the two and takes over as your penalty.
A worked example: breaking a $450,000 mortgage
Take a $450,000 balance on a fixed mortgage at a 5.49% contract rate with 28 months left in the term. Three months’ interest is straightforward: $450,000 × 5.49% gives roughly $24,705 a year, and a quarter of that is about $6,176. Now the IRD. Suppose the lender’s comparison rate for a term close to the 28 months remaining is 4.59% — a gap of 0.90%. The IRD is $450,000 × 0.90% × (28 ÷ 12), which works out to about $9,450. Since the IRD is larger, that is the penalty the lender applies. Now weigh it against the reason for breaking. If refinancing into a rate one full point lower saves roughly $4,500 a year on this balance, the $9,450 penalty pays for itself in a little over two years — inside the remaining term, so it can be worth it. Push the comparison rate higher toward a bank’s posted rate and the IRD climbs sharply, which can flip the math the other way.
How to reduce or avoid the penalty
You have more options than the payout statement suggests. Most mortgages let you prepay 15–20% of the original balance each year with no penalty, so making a lump-sum prepayment before you break can shrink the balance the penalty is calculated on. If you are moving, porting the mortgage to the new property carries no penalty at all on most A-lender products. If you simply want a better rate, ask your current lender to blend-and-extend rather than break — they blend your existing rate with today’s and reset the term at no charge. And the cleanest exit is to wait for maturity: there is never a penalty at renewal. Whatever path you take, always get a written payout statement, because the estimate above depends on a comparison rate only your lender can confirm.
Related scenarios
If you are breaking to chase a lower rate, the penalty is only half the equation — run your figure through the refinance calculator to see whether the interest you save clears the penalty plus fees, and how quickly. If your term is close to ending anyway, compare what waiting buys you in the renewal calculator before paying to break early.