Breaking Your Mortgage in Canada: What the Penalty Costs
Breaking your mortgage in Canada produces a single number, and that number arrives from the lender looking like a fact. It is not. It is the winner of a contest between two calculations, one of which comes in two different versions, and the version written into your contract can change the answer by nearly four times on the same mortgage, at the same balance, on the same day. Here is where that number comes from, in full arithmetic, including the part almost nobody sees until the payout statement lands.
When a penalty applies at all
A prepayment penalty is a fee your lender may charge if you pay more than the allowed additional amount toward your mortgage, break your mortgage contract, transfer your mortgage to another lender before the end of your term, or pay back the entire mortgage before the end of your term. The Financial Consumer Agency of Canada includes selling your home in that last category, the one that catches people by surprise. Your lender may call the same fee a prepayment charge or a breakage cost, and FCAC’s own summary is that these “can cost thousands of dollars”. With an open mortgage you can prepay without penalty. With a closed one you normally pay.
Separate from the penalty is your prepayment privilege, the amount you can put toward the mortgage on top of regular payments without triggering a fee. FCAC describes two forms: increasing your regular payments by a certain percentage, or lump sums up to a certain amount or percentage of the original mortgage amount. Note “original”, not current. Privileges vary by lender, most cap the allowed prepayment per year, and FCAC notes you usually cannot carry unused room into the next year.
The penalty is the higher of two numbers
FCAC’s prepayment penalties page (page dated October 15, 2025) states the rule plainly: the penalty will usually be the higher of an amount equal to three months’ interest on what you still owe, or the interest rate differential, the IRD. The lender will usually use the IRD calculation if two conditions both hold: the interest rate on your mortgage is higher than the current interest rate, and you signed your current contract less than five years ago. Both, not either.
FCAC publishes an example worth unpacking rather than quoting, because the arithmetic is simpler than its reputation. Assume a $200,000 outstanding balance, a current interest rate of 6%, 36 months left in a five-year term, and a lender’s current posted rate of 4% for a 36-month term. FCAC’s approximate fees are $3,000 for three months’ interest and $12,000 for the IRD. You pay $12,000, the higher of the two, and possibly an administration fee on top. Where do those come from?
- $3,000 is $200,000 x 6% x 3/12. Three months of interest on the balance, at your rate.
- $12,000 is $200,000 x (6% − 4%) x 36/12. The two-point gap between your rate and today’s, applied to the balance, for the three years left in the term.
That second line is the whole idea in one sentence: the IRD is roughly the extra interest the lender would have collected at your rate rather than today’s rate over the rest of your term. Which also explains its shape. It is large when a lot of term is left and shrinks toward nothing as you approach renewal.
The part that changes everything: which two rates
The IRD compares two interest rates, calculating the entire interest left to pay on your current term at each. Everything therefore depends on which two rates go in, and FCAC lists genuine alternatives on both sides. For the first, the lender can use the posted rate at the time you signed, or your current or discounted rate as described in your contract. For the second, it can use the current posted rate for a term of similar length, or that current posted rate minus the discount you were originally offered.
That last option is the one that hurts. Lenders advertise posted rates; when you sign, your rate may be higher or lower than posted, and a lower one is a discounted rate. If you negotiated a point and a half off, some contracts take that same point and a half off the comparison rate, widening the gap the penalty is built on. The discount that made your mortgage cheap is the discount that can make breaking it expensive. That posted-versus-discounted gap sits underneath the fixed vs variable mortgage choice too, since both product families are advertised at posted rates and negotiated down from there.
One mortgage, two answers
Take a $400,000 balance with 30 months left in a five-year term. The contract rate is 4.50%, which was the lender’s then-posted 6.00% minus a 1.50-point discount. The lender’s current posted rate for a similar three-year term is 4.25%. These rates are chosen to make the arithmetic legible and are not a statement about what any lender is quoting now.
| Calculation | How it is computed | Result | Penalty under this method |
|---|---|---|---|
| Three months’ interest | $400,000 x 4.50% x 3/12 | $4,500 | $4,500 |
| IRD against the current posted rate (4.25%) | $400,000 x 0.25 points x 30/12 | $2,500 | $4,500, because three months’ interest is higher |
| IRD against posted minus your original discount (4.25% − 1.50 = 2.75%) | $400,000 x 1.75 points x 30/12 | $17,500 | $17,500 |
Same mortgage, same balance, same day, same posted rate. $4,500 under one convention and $17,500 under the other, a ratio of 3.9 to one. Under the gentler comparison the IRD does not even win the contest, so you pay the three months’ interest floor. Under the harsher one it is nearly four times that floor. Which convention applies to you is not a market variable. It is a clause in your contract, and FCAC requires federally regulated lenders to tell you how they calculate the penalty and what factors they use.
Why the harsher method usually eats the savings
There is an uncomfortable symmetry in that table, easiest to see by asking what breaking the mortgage actually buys you.
The interest you save over the remaining 30 months by moving the same $400,000 from 4.50% to a new rate is $400,000 x (4.50% − new rate) x 30/12. That is the identical formula to the IRD. The penalty and the prize are built from the same expression.
So suppose your lender deducts your original discount, and the best rate you can get elsewhere is the current posted rate minus a similar discount, the 2.75% in this scenario. Interest saved over the remaining term: $17,500. Penalty: $17,500. Net over the rest of the term: zero, before the administration, appraisal, reinvestment, discharge and professional fees, all of which are real.
That is what the harsher IRD convention does. It claws back roughly what the remaining term would have saved you. Within the arithmetic of this illustration, the case for breaking rarely rests on the remaining term at all. It rests on the years beyond it, on locking a lower rate into a fresh five-year term, on having a contract that uses the gentler comparison, or on not paying the penalty at all. FCAC notes that federally regulated financial institutions, banks included, have a prepayment penalty calculator on their website. That is where your actual figure comes from.
What actually reduces the number
Use your prepayment privileges, and use them before you break. FCAC’s first tip is to make full use of your privileges every year, because future penalties are based on a lower balance, and to make a lump-sum prepayment before you break rather than after. The caveat in the same paragraph matters: some lenders restrict your ability to prepay when you are close to the date you break the contract, so this is a call to make early.
The effect is calculable. Keep the scenario above and assume the original mortgage was $450,000 with a 10% lump-sum privilege, giving $45,000 of room. Paying it drops the balance from $400,000 to $355,000, and the $17,500 penalty under the harsher method falls to $15,531.25, a saving of $1,968.75. In this scenario, with its 1.75-point gap and 30 months remaining, every $10,000 prepaid removes $437.50 from the penalty. That figure is not a constant. It is this scenario’s rate gap times its remaining term, and yours will differ.
Wait for the end of the term. When the penalty is large, FCAC’s advice is to wait and prepay at term end, where a lump sum goes in without penalty. Its other tip is to shop around when you renew, contacting several lenders and brokers. The renewal window is where you renegotiate the rate instead of buying your way out of it, and we walked through what that statement does and does not commit you to in our piece on mortgage renewal.
Port the mortgage. If you are buying a new home, ask whether you can port, which takes your existing interest rate, terms and conditions with you and saves you from breaking the contract at all.
Blend and extend. Lenders may let you extend the term early without a prepayment penalty, though administrative fees may apply, by blending your old rate with the new term’s rate. FCAC’s page on breaking your mortgage contract (also dated October 15, 2025) works an example: a $200,000 balance, 22 years of amortization remaining, a 5.5% current rate, 24 months left, and a current five-year rate of 4%. Multiply 5.5% by the 24 months remaining for 132. The new 60-month term less those 24 months leaves 36 months, and 4% x 36 gives 144. Add for 276, divide by the 60 months of the new term, and the blended rate is 4.6% for the next 60 months. FCAC calls this “a simplified method … for illustration purposes” and says your lender must tell you how it calculates the new rate.
The fees that are not the penalty
The penalty is the headline, not the invoice. FCAC also lists administration fees, appraisal fees, reinvestment fees, and a mortgage discharge fee to remove the charge on your current mortgage and register a new one. You may also have to repay any cash back you received when you took the mortgage out.
On the discharge side, FCAC’s discharging a mortgage page (page dated September 25, 2025) gives ranges. Some provinces and territories regulate the maximum discharge fee; where it is unregulated the lender sets its own, a range FCAC puts at anywhere from no charge up to $400, and federally regulated lenders must disclose that fee in the contract. Professional fees for the discharge work itself, a lawyer, a notary or a commissioner of oaths, sit between $400 and $2,500 on FCAC’s figures. When you change lenders your property title has to be updated, some lenders charge assignment fees for switching, and it is worth asking the new lender whether they will cover the discharge costs.
One more item belongs on the list even without a dollar figure attached. Among FCAC’s cons of breaking a mortgage contract is that you may no longer qualify for a mortgage under current economic conditions. Breaking is not only a fee decision, it puts you back through an approval, and that qualifying arithmetic is its own subject, which we set out in how much mortgage you can qualify for.
Start with the information box
All of this is knowable in advance. Federally regulated lenders must put prepayment privileges, prepayment penalties and other key details in an information box at the beginning of your mortgage agreement, must tell you how they calculate the penalty and what factors they use, and must keep those details clear, simple and not misleading.
So the sequence is: find the information box, find which two rates your contract compares, then run your bank’s calculator. If the contract subtracts your original discount from the comparison rate, you now know why the number is what it is, and that the remaining term alone is unlikely to justify the decision.
Data as of September 11, 2026. FCAC pages dated October 15, 2025 (prepayment penalties, and breaking your mortgage contract) and September 25, 2025 (discharging a mortgage). All scenario figures above are calculated on the stated illustrative examples and are not quotes, offers or statements about current market rates.
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