Mortgage
Penalty Guide
Breaking your mortgage early can cost thousands. Learn how penalties are calculated and how to minimize or avoid them.
How Mortgage Penalties Work
In Canada, breaking your mortgage before the term ends triggers a penalty. Here's how it's calculated.
Fixed-Rate Mortgage
Penalty = Greater of:
- 1.3 months' interest on remaining balance
- 2.Interest Rate Differential (IRD) — the difference between your rate and the current rate for the remaining term
Example: $500K mortgage at 5%, 3 years left. Current 3-yr rate is 4%. IRD = (5% - 4%) × $500K × 3 years = $15,000 penalty.
Variable-Rate Mortgage
Penalty = 3 months' interest on the remaining balance.
Example: $500K balance at 5.29%. 3 months' interest = $500K × 5.29% ÷ 12 × 3 = $6,613 penalty.
Variable-rate penalties are typically much lower than fixed-rate IRD penalties.
How to Avoid or Minimize Penalties
Wait Until Renewal
When your term ends, you can switch lenders penalty-free. Start shopping 120 days before maturity.
Use Prepayment Privileges
Most mortgages allow 10-20% prepayment per year. Use this to reduce your balance and penalty.
Port Your Mortgage
If buying a new home, you may be able to 'port' your existing mortgage to the new property, avoiding penalties.
Negotiate a Blend & Extend
Some lenders let you blend your old rate with a new rate and extend the term, reducing the penalty.
Switch to Variable Rate
If breaking a fixed-rate mortgage, switching to variable first can reduce the penalty calculation.
Get a Broker to Cover It
Some lenders will offer a cash-back incentive to cover your penalty when you switch. We can find these deals.
Penalty FAQs
How is a mortgage penalty calculated in Canada?▼
How much does it cost to break a mortgage in Canada?▼
Can I avoid mortgage penalties by switching lenders?▼
Facing a big mortgage penalty?
Our team can assess your penalty, explore your options, and find lenders who will cover or reduce your penalty cost.