About the Canada Mortgage Penalty Calculator
This mortgage penalty calculator estimates what a Canadian lender will charge if you break your mortgage before the end of its term — to sell, refinance at a lower rate or switch lenders. Variable-rate mortgages usually cost three months’ interest. Closed fixed-rate mortgages cost the greater of three months’ interest and the interest rate differential (IRD), which can be many times larger when rates have fallen since you signed.
The IRD compares your contract rate with the rate the lender can charge today for a term close to the time you have left. Many big banks calculate that comparison rate from their posted rates and subtract the discount you received when you signed, which inflates the penalty. Choose the posted-rate method to model that, or enter a comparison rate directly if your lender uses its current discounted rates.
The result is an estimate: your mortgage contract sets the exact method, and you should ask your lender for a payout statement before acting. If your mortgage lets you prepay a percentage of the balance each year without penalty, enter the unused allowance — many lenders apply it before calculating the penalty.
With the default inputs, the estimated prepayment penalty is $15,000.00. Change any value above to recalculate instantly.
How to use the canada mortgage penalty calculator
- 1Enter your current balance, mortgage type and contract rate.
- 2For a fixed rate, enter the months left in your term.
- 3Pick the comparison method and enter the posted or comparison rates from your lender.
- 4Add any unused penalty-free prepayment allowance.
- 5Compare three months’ interest with the IRD — the higher one is your estimated penalty.
Formula and method
Three months’ interest is the balance multiplied by your annual rate and divided by four. The interest rate differential is the balance multiplied by the gap between your contract rate and the comparison rate, scaled by the fraction of a year left in your term. A closed fixed-rate mortgage pays whichever is higher; a variable-rate mortgage normally pays only three months’ interest.
With the posted-rate method the comparison rate is the lender’s current posted rate for a term close to your remaining months minus the discount you got at signing (original posted rate − your contract rate). The direct method uses whatever comparison rate you enter. Lenders may apply any unused annual prepayment privilege first, so the calculator charges the penalty on the balance after that allowance. Real IRD formulas differ slightly between lenders (some discount the cash flows), so treat the result as an estimate.
- B
- Balance subject to the penalty (after any prepayment allowance)
- r
- Your contract interest rate
- c
- Comparison rate for the remaining term
- m
- Months remaining in the term
Worked examples
Big-bank fixed mortgage with 30 months left
Your discount at signing was 6.99% − 5.29% = 1.70%, so the comparison rate is 5.49% − 1.70% = 3.79%. The 1.50% gap on $400,000 for 2.5 years gives an IRD of $15,000, almost three times the $5,290 of three months’ interest.
Same mortgage using a discounted comparison rate
If the lender compares with its current 4.89% rate, the IRD is 0.40% × $400,000 × 2.5 years = $4,000. That is below three months’ interest, so the penalty is $5,290.
Variable mortgage, $350,000 at 4.6% with 10% prepayment used
Prepaying 10% first leaves $315,000 subject to the penalty. Three months’ interest at 4.6% is $315,000 × 4.6% ÷ 4 = $3,622.50, the usual variable-rate penalty.
Frequently asked questions
How is a mortgage penalty calculated in Canada?+
For a variable-rate mortgage it is usually three months’ interest. For a closed fixed-rate mortgage it is the greater of three months’ interest and the interest rate differential, which depends on how far rates have fallen and how long is left in your term.
Why are big bank IRD penalties so high?+
Many banks calculate the comparison rate from posted rates and subtract the discount you received when you signed. Because posted rates are well above the rates people actually pay, this produces a lower comparison rate and a bigger differential than using current discounted rates.
Can I avoid a mortgage penalty?+
Often you can reduce or avoid it by porting the mortgage to a new home, blending and extending with your lender, using your annual prepayment privileges first, waiting until closer to renewal, or having a buyer assume your mortgage.
Is it worth breaking my mortgage to get a lower rate?+
Compare the penalty plus legal, appraisal and discharge fees with the interest you would save over the rest of your current term. If the savings over the remaining months exceed all the costs, breaking can make sense.
Do I pay a penalty when I renew?+
No. At the end of your term you can renew, switch lenders or pay off the mortgage without a prepayment penalty. Penalties apply only when you break a closed mortgage before its maturity date.
Results are estimates for educational purposes and are not financial advice. Rates, fees and terms vary — confirm with your lender or a licensed advisor before making decisions.