Mortgage Penalty in Canada

Mortgage Penalty in Canada (2026): Three Months Interest vs the IRD, Worked in Full

Short answer: A prepayment penalty is what a lender charges when you pay off a closed mortgage, or pay more of it than your prepayment privileges allow, before the term ends. On a closed variable rate mortgage the penalty is usually three months interest on the amount you pay early. On a closed fixed rate mortgage it is the greater of three months interest and the interest rate differential, or IRD. The Financial Consumer Agency of Canada (FCAC) works this example: a $200,000 balance at 6 percent, 36 months left, and a current 4 percent rate for that remaining time gives three months interest of about $3,000 and an IRD of about $12,000, so the penalty is about $12,000. Run your own balance and rates on the Canadian Mortgage Penalty Calculator as you read.

By Finance Editorial Desk | October 23, 2026

Educational only, not mortgage or legal advice. The rules and the worked example in sections 2 to 5 come from the Financial Consumer Agency of Canada pages named in the sources section, read on the date above. Every lender calculates the IRD its own way, and your mortgage agreement states how yours does it. The lender's payout statement is the authoritative figure for your mortgage.

The estimate in 6 steps

1. Find your current balance, your contract rate, and the months left in your term.
2. Work out three months interest: balance x contract rate / 12 x 3.
3. Find the lender's comparison rate for a term close to the time you have left.
4. Work out the IRD: balance x (contract rate - comparison rate, floored at zero) x months remaining / 12.
5. Take the figure that applies to your mortgage type: variable, three months interest; fixed, the greater of the two.
6. Add the fees around the penalty (discharge, administration, appraisal, legal, cash-back repayment) before you decide anything.

1. When a penalty applies, and when it does not

A mortgage term is a contract period. A closed mortgage gives you a lower rate than an open one in exchange for limits on how much you can pay early. Cross those limits before the term ends and the lender charges a prepayment penalty, also called a prepayment charge.

The FCAC lists the situations that can trigger the charge:

• You pay off the mortgage in full before the end of the term.
• You refinance the mortgage with a different lender.
• You transfer the mortgage to another lender before the term ends.
• You pay a lump sum larger than your prepayment privilege allows. The charge then applies to the amount above the privilege, not the whole balance.

And the situations where there is no penalty of this kind:

• At the end of the term. Paying the mortgage off on the renewal date carries no prepayment penalty.
• An open mortgage. An open mortgage can usually be paid in full at any time with no penalty. The trade is a higher rate while you hold it.
• Prepayments inside your privileges. Closed mortgages normally carry annual privileges, such as a lump sum up to a stated percentage and a payment increase, that you can use with no charge.
• Terms longer than five years, after year five. FCAC states that if your mortgage term is more than five years, you can pay it in full after five years and the prepayment charge is capped at no more than three months interest.

Everything below is about the closed mortgage case, because that is where the five-figure surprises live.

2. Formula one: three months interest

Three months interest is the simpler of the two calculations, and every closed mortgage penalty starts here.

Three months interest = balance x contract rate / 12 x 3

Divide the annual contract rate by 12 to get one month of interest on the balance, then multiply by 3. Worked on three balances:

Two properties of this formula drive the rest of the guide. First, it does not care what market rates have done since you signed. It prices one quarter of a year at your own rate, nothing else. Second, it scales only with your balance and your rate, so it falls steadily as you pay the mortgage down. A variable rate closed mortgage normally stops at this figure. A fixed rate closed mortgage treats it as the floor.

3. Formula two: the interest rate differential

The IRD prices the lender's rate loss. If you leave a 6 percent contract and the lender can only re-lend that money at 4 percent for the time you had left, the lender loses 2 percent a year on your balance for that period. The IRD charges you that loss.

IRD = amount paid early x (contract rate - current rate for the remaining term) x months remaining / 12

The current rate in that formula is the lender's rate for a mortgage with a term close to the time you have left, not the rate on a brand new five-year mortgage. With 28 months left, the comparison is against the lender's rate for roughly a two to three year term.

FCAC's own worked example, step by step:

• Balance: $200,000. Contract rate: 6 percent. Time left: 36 months. Current rate for that time: 4 percent.
• Three months interest: $200,000 x 6 percent / 12 x 3 = $3,000.
• IRD: $200,000 x (6 percent - 4 percent) x 36 / 12 = $200,000 x 2 percent x 3 years = $12,000.
• Penalty on a fixed mortgage: the greater of the two, so about $12,000, before any administration fee.

The IRD has three multipliers, and each one can move the result a lot: the balance, the size of the rate gap, and the time left. A 2 percent gap over 3 years on $200,000 already reaches $12,000. Double the balance and you double the IRD. That is the arithmetic behind the penalty figures that shock sellers mid-term.

One warning belongs here, and FCAC states it plainly: each lender calculates the IRD differently, and some lenders subtract the discount you received at signing from the comparison rate before they run the formula. Subtracting your original discount makes the comparison rate lower, the gap wider, and the IRD larger than the plain version above. The plain version is the right planning estimate. The lender's version, with its own comparison rate and its own discount rule, is the number on your payout statement, and section 9 covers how to get it and check it.

4. Which formula applies to you

The last row is the one borrowers miss. The IRD only bites when rates have fallen since you signed, because only then is the gap positive. If rates have risen, the lender can re-lend your money at a higher rate than your contract, there is no rate loss to charge for, and the penalty falls back to three months interest. Section 6 prices that case in full.

5. Worked example: a $420,000 fixed mortgage with 28 months left

This is the worked example on the penalty calculator page, priced here in full. Hypothetical figures, used only to show the math: a $420,000 balance, a 5.25 percent contract rate, a 3.75 percent comparison rate, and 28 months left in the term.

1. One month of interest: $420,000 x (5.25 percent / 12) = $1,837.50.
2. Three months interest: $1,837.50 x 3 = $5,512.50.
3. Rate gap: 5.25 percent - 3.75 percent = 1.50 percentage points.
4. Time left in years: 28 / 12 = 2.33 years.
5. IRD: $420,000 x 1.50 percent x 2.33 = $14,700.00.
6. Fixed rate penalty: the greater of $5,512.50 and $14,700.00, so $14,700.00.

The same mortgage on a variable rate would stop at step 2 and cost $5,512.50. The $9,187.50 difference between the two outcomes is entirely the IRD: the price of leaving a fixed contract whose rate sits above today's rate for the remaining time.

How fast the IRD grows with the gap and the clock, on a $400,000 balance:

Read the table the way a lender's formula reads your file: every extra year left in the term adds a full year of the rate gap on the whole balance. This is why a penalty quoted in year one of a five-year term and a penalty quoted in year four, on the same mortgage at the same rates, are different numbers by thousands of dollars.

6. Worked example: when rates have risen, the IRD disappears

Hypothetical figures again: a $500,000 fixed mortgage at 3.79 percent, signed when rates were low, with 30 months left and a current comparison rate of 5.10 percent.

• Three months interest: $500,000 x 3.79 percent / 12 x 3 = $4,737.50.
• Rate gap: 3.79 percent - 5.10 percent = negative, so the IRD is zero. There is no rate loss to price.
• Penalty: $4,737.50.

Breaking this mortgage is comparatively cheap, and the reason has nothing to do with the borrower. The lender gets the money back and can lend it again at 5.10 percent instead of 3.79 percent. Penalties are largest exactly when breaking looks most attractive, when your contract rate is well above what a new borrower pays today. Price the penalty first and the new rate second, never the other way around.

A variable rate example completes the set. Hypothetical: a $380,000 closed variable mortgage at 4.95 percent. The penalty is three months interest: $380,000 x 4.95 percent / 12 x 3 = $4,702.50, whatever market rates have done, and however much time is left in the term. Variable penalties are smaller and predictable; fixed penalties are the ones that need the full calculation.

7. The fees that sit around the penalty

The penalty is the largest line on a payout statement, rarely the only one. FCAC lists the charges that can accompany breaking a mortgage, and each one belongs in your total before you compare it against any saving:

• Administration fee charged by the lender for the payout itself.
• Appraisal fee, if the new lender or the transaction requires a fresh valuation.
• Investment fees, where the payout involves registered or investment-linked products.
• Legal fees for the discharge and, on a refinance or switch, the new registration.
• Mortgage discharge fee for removing the old mortgage from title.
• Cash-back repayment. If your current mortgage came with cash back and you break early, you may have to repay some or all of it, usually in proportion to the time left in the term.

None of these amounts is fixed nationally. They are set by your lender, your province, and your lawyer or notary, so this guide does not put dollar figures on them. Ask for each one in writing and add them to the penalty before you run the break-even test in section 8. A refinance that saves $200 a month against a $14,700 penalty and $1,500 of fees needs a different answer than the same refinance against the penalty alone.

8. Does breaking pay? The break-even test

A penalty is worth paying only when the saving from the new mortgage repays it while you actually hold the new mortgage. The test has three steps:

1. Price the total cost of breaking: penalty plus the fees in section 7.
2. Price the monthly saving: your current payment minus the payment on the new mortgage at its rate, on the same balance and the same amortization.
3. Divide the total cost by the monthly saving. The result is the number of months the new mortgage must run before the break has paid for itself.

Hypothetical worked example, built from section 5: you owe $420,000 at 5.25 percent with a 20 year amortization, and a new lender offers 3.99 percent on the same balance and amortization. Canadian mortgages compound semi-annually, so the monthly payments are $2,816.90 at 5.25 percent and $2,535.66 at 3.99 percent, a saving of $281.24 a month. Against the $14,700 penalty from section 5, the break-even is $14,700 / $281.24 = about 52 months, before fees. If you expect to move, sell, or renew again inside four years, this break does not pay for itself on payment savings alone. If the refinance also removes a more expensive debt or changes the amortization, those effects belong in the comparison as their own lines. The Mortgage Refinance Break-Even Guide runs this test in its full form, including the cases where the penalty is added to the new balance.

Two cautions on the test. First, run it on the lender's penalty figure, not the estimate, once you have the payout statement. A posted-rate IRD method can move the penalty enough to move the answer. Second, a longer amortization on the new mortgage lowers the payment without lowering the cost; the saving in step 2 must come from the rate, on the same amortization, or the test flatters the refinance.

9. Getting the exact figure, and checking it

An estimate tells you whether breaking is worth investigating. The lender's figure tells you whether to sign. FCAC sets out what you are entitled to and what to ask:

• Your mortgage agreement must show the method. For federally regulated lenders, the agreement has to explain how the prepayment charge is calculated and describe each element that goes into it, so you can work it out yourself. That explanation sits in the information box in your agreement. If your mortgage came from a credit union or a provincially regulated lender, the contract still states the method; read the prepayment section of the contract itself.
• Ask for the calculation, not just the total. The inputs to request: the balance used, the comparison rate used, where that rate came from and on what date, whether your original discount was subtracted from it, and the exact number of days left in the term. With those inputs you can reproduce the IRD on the penalty calculator and see which input is doing the damage if the figure surprises you.
• Use the lender's own tools. Federally regulated financial institutions must provide a prepayment calculator and a toll-free line that gives the same prepayment information. Their online figure and the payout statement should agree; if they do not, ask which one governs.
• Mind the renewal clock. Twenty-one days before the end of your term, your lender must tell you whether a prepayment charge would apply if you paid the mortgage in full on the renewal date. That notice, plus the renewal statement, is your penalty-free exit window, and the Mortgage Renewal Guide covers how to use the months before it.

Get the payout statement in writing before you sign a sale, a refinance, or a discharge that depends on the amount. Penalty figures are calculated to a specific payout date and drift as the date moves, because both the balance and the days left in the term change daily.

10. Four ways to make the penalty smaller

Use your prepayment privileges before you break. Both penalty formulas are calculated on the balance, so a smaller balance means a smaller charge. If your contract allows a lump sum privilege this year and you have not used it, paying $40,000 against the section 5 mortgage before the payout drops the balance to $380,000: three months interest falls to $4,987.50 and the IRD falls to $13,300.00, a $1,400 saving on the penalty itself. Check the contract for any rule about prepayments made shortly before a payout, and stay inside the privilege so the prepayment itself does not trigger a charge.

Let the clock run. The IRD is proportional to the time left. The section 5 mortgage with 6 months left instead of 28 has an IRD of $420,000 x 1.50 percent x 6 / 12 = $3,150.00, which is below three months interest, so the penalty falls to the $5,512.50 floor. A break that is optional in month 30 of a term is usually cheaper, and at renewal it is free. If a sale forces the date, this lever is not available; if the break is a rate play, it usually is.

Ask about porting when you move. Some contracts let you move the existing mortgage to a new property, keeping the rate and the remaining term instead of discharging the loan. Where the contract allows it and the new property qualifies, porting avoids the penalty entirely. The qualifying rules are the lender's, so get the answer in writing before you commit to a purchase that assumes a port.

Compare the total, then negotiate the pieces. A new lender competing for your business cannot change your current lender's penalty, but the fees in section 7 and any cash-back offer on the new mortgage change the total cost of the move. Compare totals, not penalties, and keep the break-even result from section 8 in front of you while you do it.

11. Mistakes that make penalties worse

• Signing a sale or refinance before pricing the penalty. The penalty is knowable in advance to within the lender's IRD method. Price it first.
• Estimating the IRD with a discounted comparison rate. If your lender uses posted rates, or subtracts your original discount, its IRD will exceed the plain estimate. Treat the estimate as a floor for planning, not a quote.
• Breaking early in the term for a small rate gain. Section 5's table shows why: time left multiplies the gap. A half-point saving rarely repays a three or four year IRD.
• Forgetting the cash-back clawback. Repaying cash back is proportional to the time left and lands on the same payout statement as the penalty.
• Exceeding a prepayment privilege by accident. A lump sum above the privilege triggers a charge on the excess in a year when you were not planning to break at all.
• Assuming the variable rule. Three months interest is the variable and floor case. On a fixed mortgage after a rate drop, the IRD is the case, and it is several times larger.

12. Questions and answers

How is a mortgage penalty calculated in Canada? On a closed variable rate mortgage, usually three months interest on the amount paid early: balance x contract rate / 12 x 3. On a closed fixed rate mortgage, the greater of three months interest and the interest rate differential. The lender's contract states the exact method, and the payout statement gives the exact figure.

What is the IRD in plain terms? The interest rate differential is the lender's rate loss from your early exit, charged to you: the amount paid early, times the gap between your contract rate and the lender's current rate for the time you have left, times that remaining time in years. On $200,000 with a 2 point gap and 3 years left, it is $12,000.

Why is my penalty so much larger than three months interest? Because you hold a fixed mortgage, rates have fallen since you signed, and years remain in your term. Those three facts together make the IRD the larger figure, and the IRD grows with each of them. A lender that uses posted rates, or subtracts your original discount from the comparison rate, produces a larger IRD still.

How much is the penalty on a $420,000 mortgage? It depends on the rate, the rate gap, and the time left, which is the point of the worked example in section 5: at a 5.25 percent contract rate, a 3.75 percent comparison rate, and 28 months left, the penalty is $14,700 on a fixed mortgage and $5,512.50 on a variable one. At renewal it is zero. Enter your own figures on the penalty calculator for your case.

Can I reduce the penalty before breaking? Yes, within limits. Prepaying inside your privileges lowers the balance both formulas use; in the worked example a $40,000 prepayment cuts the IRD from $14,700 to $13,300. Waiting reduces the time multiplier, and at the end of the term the penalty disappears. Porting, where your contract allows it, avoids the charge on a move.

Do I pay a penalty if I break a variable rate mortgage? Usually yes, but only the three months interest figure, with no IRD. On a $380,000 balance at 4.95 percent that is $4,702.50. An open variable mortgage can usually be paid off at any time with no penalty, at the cost of a higher rate while you hold it.

What happens to the penalty if my term is longer than five years? FCAC states that on a term of more than five years, you can pay the mortgage in full after five years with a prepayment charge of no more than three months interest. The IRD cannot be charged past that point.

Is the calculator's figure the amount I will pay? No. It is a planning estimate built on the plain IRD method. Your lender's method, comparison rate, and exact payout date decide the real figure, which is why section 9 tells you to get the payout statement and its inputs in writing before you sign anything that depends on the amount.

13. Related reading

• Canadian Mortgage Penalty Calculator - enter your balance, contract rate, comparison rate, and months left, and get both formulas priced for your mortgage type.
• Mortgage Refinance Break-Even (Canada) - the full break-even test for refinancing, including adding the penalty to the new balance.
• Mortgage Renewal in Canada - the penalty-free exit at the end of the term, and the payment shock math if your rate resets higher.
• Canadian Mortgages Guide - how Canadian mortgage rates compound, and how terms, amortization, and payments fit together.
• Mortgage Stress Test Guide - the qualifying rate a switch or refinance has to pass, and when the straight-switch exemption applies.
• Private Mortgage Penalty Calculator - private and many B-lender contracts use yield maintenance instead of the formulas here; that calculator models the other rule set.

14. Sources

• Financial Consumer Agency of Canada, "Prepayment penalties": a prepayment penalty can apply when you pay more than your privileges allow or pay off the mortgage early, including on a refinance or a transfer to another lender; open mortgages can usually be repaid at any time with no penalty; closed variable rate mortgages usually carry three months interest; closed fixed rate mortgages carry the greater of three months interest and the interest rate differential; the worked example of a $200,000 balance at 6 percent with 36 months left against a current 4 percent rate, giving about $3,000 of three months interest and about $12,000 of IRD; the IRD formula as the amount prepaid times the rate difference times the months remaining divided by 12; lender variation in the IRD, including subtracting the original discount from the comparison rate; the additional charges that can accompany a break (administration, appraisal, investment and legal fees, discharge fee, proportional cash-back repayment); and the five-year rule capping the charge at three months interest on terms longer than five years once five years have passed (canada.ca, Financial Consumer Agency of Canada).
• Financial Consumer Agency of Canada, "Prepayment privileges" and mortgage agreement disclosure: prepayment privileges let you increase payments or pay lump sums by stated amounts without a prepayment charge; federally regulated lenders must explain how the prepayment charge is calculated in the mortgage agreement information box and describe each element used, and must provide a prepayment calculator and a toll-free line giving the same information; and the requirement that the lender state, 21 days before the end of the term, whether a prepayment charge would apply to a payoff on the renewal date (canada.ca, Financial Consumer Agency of Canada).