Mortgage Penalty Calculator
Find out what it will cost to break your mortgage early. We estimate both the 3-month interest penalty and the Interest Rate Differential (IRD) so you can see which one your lender will charge.
Used for the IRD calculation. Use today's posted rate closest to your remaining term.
This is an estimate. Big banks often use posted-rate IRD formulas that produce higher penalties. Always confirm with your lender.
If you break your mortgage before the end of your term — to sell, refinance, or switch lenders — you'll usually pay a prepayment penalty. For variable-rate mortgages this is almost always three months' interest, a relatively predictable amount. For fixed-rate mortgages, lenders charge the greater of three months' interest or the Interest Rate Differential (IRD), and that's where penalties can become surprisingly large.
How the IRD works
The IRD compensates the lender for the interest they lose when you break a fixed mortgage while current rates are lower than your contract rate. The calculation multiplies three things: your outstanding balance, the gap between your rate and the lender's current rate for your remaining term, and the number of years left. So the bigger the rate gap and the more time left on your term, the larger the IRD. When rates have fallen sharply since you signed, the IRD on a five-year fixed broken early can reach tens of thousands of dollars.
Posted-rate vs discounted-rate IRD
Not all lenders calculate the IRD the same way, and the difference is huge. The big banks typically use their inflated posted rates in the formula, which widens the differential and inflates the penalty. Many monoline and credit-union lenders use the discounted rates customers actually pay, producing a far smaller penalty for the same mortgage. This is one of the most important and least understood differences between lenders — and a reason to read the prepayment clause carefully before you sign, not just when you want to leave.
How to reduce or avoid the penalty
You have more options than simply paying. Port your mortgage to your new home to carry the existing rate and skip the break entirely. Use your annual prepayment privileges first to shrink the balance the penalty is calculated on. Ask about a blend-and-extend, which mixes your rate with a new one and avoids a formal break. Or simply wait for renewal, when no penalty applies. Before you break, weigh the penalty against your potential savings — our refinance calculator turns these numbers into a break-even point so you can see whether leaving early actually pays.
Frequently asked questions
How is a mortgage penalty calculated in Canada?
For a variable-rate mortgage the penalty is usually three months' interest on your balance. For a fixed-rate mortgage it's the greater of three months' interest or the Interest Rate Differential (IRD) — the difference between your contract rate and the lender's current rate for a term matching the time you have left, applied to your balance for the remaining months.
Why is my mortgage penalty so high?
Big-bank fixed penalties use a 'posted rate' IRD calculation that can be thousands of dollars higher than a monoline or credit-union lender's. The posted rate is artificially high, which widens the rate differential the bank applies. If you broke a five-year fixed early after rates fell, the IRD can reach tens of thousands of dollars — sometimes 4% or more of the balance.
Can I avoid or reduce a mortgage penalty?
Yes, several ways: port your mortgage to a new property instead of breaking it, wait until renewal when no penalty applies, use your annual prepayment privileges to shrink the balance the penalty is calculated on first, or choose a variable rate, which caps the penalty at three months' interest. A blend-and-extend with your current lender can also avoid a break entirely.
Is a mortgage prepayment penalty tax deductible in Canada?
For a principal residence, no — the penalty is a personal cost and isn't deductible. If the mortgage is on a rental or business property, the penalty may be deductible as a financing or carrying cost, sometimes over several years. Confirm your specific situation with an accountant before relying on a deduction.
Does the penalty change as I get closer to renewal?
Yes. The IRD shrinks as your remaining term gets shorter, because it's applied over fewer months. A penalty that's painful with three years left can be modest with six months to go. If you're close to renewal, it's often worth waiting rather than breaking early.
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