Canadian Mortgage Penalty Calculator

A closed mortgage is a contract for a set term. In exchange for a lower rate than an open mortgage, you agree to keep the loan for that term. If you pay it out early, by refinancing with another lender, selling without porting, or discharging the mortgage, the lender charges a prepayment penalty to recover part of the interest it expected to earn. The size of that penalty depends on whether your rate is variable or fixed.

Variable rate closed mortgages use the simpler rule: the penalty is three months of interest on the balance you still owe. Take the balance, multiply by your contract rate, divide by twelve to get one month of interest, then multiply by three. On a falling rate path this figure is painful but predictable, and it does not grow just because market rates moved.

Fixed rate closed mortgages use the greater of two figures: three months of interest, or the interest rate differential, usually shortened to IRD. The IRD estimates the lender's loss when the rate you contracted for is higher than the rate for the time remaining in your term. If rates have fallen since you signed, the IRD can be many times larger than three months of interest. If rates have risen, the IRD shrinks toward zero and the three months interest figure takes over. That is why the same mortgage can be cheap to break in one year and expensive to break in another.

Most borrowers shop with discounted rates in mind. You negotiated your mortgage down from the posted rate, and you compare new offers by their discounted rates too. The surprise inside many fixed mortgage contracts is that the IRD comparison is not always run against a discounted rate. Many lenders calculate the differential using posted rates: the rate on their public rate sheet for a term that matches the time you have left, compared against the posted rate history tied to your contract.

Posted rates sit well above discounted rates, and the spread is not the same at every term length. That means the gap the lender uses can be wider than the gap between the rate you pay and the rate you could get today. A wider gap, applied to your full balance over the years left in the term, is what turns a penalty a borrower guessed at in the low thousands into a five-figure payout line. Nothing about your payment has to change for this to happen; it is the comparison method doing the work.

The practical response is to ask, before you sign anything that triggers a payout, for the lender's payout statement and the IRD inputs behind it: the comparison rate used, the date it was taken from, and the exact days left in the term. This calculator gives you the simple version of the same math so you can sanity-check the statement. If the lender's figure is far above the estimate here, the posted-rate method is the most likely reason, and the statement is the document that settles it.

Use prepayment privileges first. Many closed mortgages include annual privileges that let you put a lump sum against the principal, or raise your regular payment, without triggering the penalty. Every dollar of principal you remove lowers the balance that both penalty formulas are built on. If a move or refinance is a few months away, using the current year's privilege before the payout date is one of the few levers that reliably reduces the charge.

Time the payout to the term. The IRD scales with the time left in the term, so a payout near the end of the term carries a small differential even when rates have fallen. If the break is optional, waiting for renewal removes the penalty entirely. If it is not optional, ask how the figure changes at the next term boundary before you pick a closing date.

Check porting before paying. Some contracts let you port the existing mortgage to a new property, keeping the rate and term instead of discharging the loan. Porting, where the contract allows it and the new property qualifies, can avoid the penalty altogether. The qualifying rules are the lender's, so confirm them in writing before you commit to a purchase.

Know which penalty world you are in. The three months interest and IRD pattern on this page describes standard closed mortgages. Private and many B-lender contracts work differently: they can demand yield maintenance, which is all of the interest for the time left on the contract, plus discharge, administration, and legal fees. If that is your situation, run the numbers on the private mortgage penalty calculator instead. The two products answer different questions, because the contracts behind them are written to different rules. Using the regulated-lender estimate on a private mortgage would understate the exit cost badly, and using the private model on a bank mortgage would overstate it.