When a penalty applies
FCAC says a lender may charge a prepayment penalty (also called a prepayment charge or breakage cost) when you:
- pay more than your allowed prepayment amount,
- break your mortgage contract,
- transfer your mortgage to another lender before the end of the term, or
- pay off the whole mortgage before the end of the term, including when you sell your home.
With an open mortgage you can prepay without a penalty. At the end of your term (maturity) you can also pay down or move the mortgage without a prepayment penalty.
The two common methods
| Three months’ interest | Interest rate differential (IRD) | |
|---|---|---|
| What it is | Roughly three months of interest on the amount you prepay or still owe | The interest difference between your rate and a comparison rate, over the rest of your term |
| Closed variable rate | Usually the whole penalty | Usually not used |
| Closed fixed rate | Charged if it is higher than the IRD | Charged if it is higher, often when rates have fallen since you signed |
| Size | Fairly predictable | Can be several times larger, especially with years left in the term |
FCAC says the penalty on a fixed-rate mortgage will usually be the higher of the two, and that lenders usually use the IRD when your rate is higher than the current rate and you signed less than five years ago. For the IRD, a lender compares two rates, such as your contract rate and its current posted rate for a term close to the time you have left, and works out the interest left on your term at each. The difference is the IRD. Some lenders start from the posted rate when you signed, or subtract the discount you were originally given, which can make the IRD larger.
Worked example
Say you owe $400,000 at a 5.00% fixed rate with 30 months left in your term. Your lender’s current rate for a similar term is 4.00%. A simple estimate:
- Three months’ interest: $400,000 × 5.00% × 3 ÷ 12 = $5,000.00
- IRD: $400,000 × (5.00% − 4.00%) × 30 ÷ 12 = $10,000.00
The penalty would be the higher amount, about $10,000, plus any administration fee. If the same $400,000 were on a variable rate of 3.40%, three months’ interest would be about $3,400. FCAC’s own example, $200,000 at 6% with 36 months left and a 4% comparison rate, works out to $3,000 for three months’ interest and $12,000 for the IRD.
This is a rough, simple-interest estimate. Your lender’s formula, its comparison rate and your remaining balance will change the real figure, so ask for a written quote.
Ways to reduce the penalty
- Use your prepayment privilege first. FCAC suggests a lump-sum prepayment before you break, so the penalty is based on a lower balance. Ask whether your lender restricts this close to a payout.
- Wait for maturity if the penalty is large and the timing is flexible.
- Port the mortgage to your new home if your contract allows it, instead of breaking it.
- Ask for the numbers in writing. Federally regulated lenders must explain how they calculate the penalty, and FCAC notes that banks offer penalty calculators on their websites.
Frequently asked questions
How is a mortgage prepayment penalty calculated in Canada?
On a closed fixed-rate mortgage it is usually the higher of three months’ interest or the interest rate differential (IRD). On a closed variable-rate mortgage it is usually three months’ interest. Your contract sets the exact method.
What is the interest rate differential (IRD)?
The IRD is the difference between the interest left on your term at your mortgage rate and the interest at a comparison rate, usually the lender’s current rate for a similar term. It tends to be large when rates have fallen since you signed and you have years left in the term.
Do I pay a penalty if I switch lenders at renewal?
Not a prepayment penalty at the end of your term. You may still pay switching costs such as discharge, appraisal or legal fees, and some new lenders will cover part of them.
How can I make my mortgage penalty smaller?
Use your yearly prepayment privilege before you break the mortgage, wait until maturity if you can, port the mortgage if you are moving, and ask your lender for a written penalty quote.
Try it with your numbers
Open the free calculator, enter the balance, rate and amortization from your own mortgage statement, then switch the payment frequency or add an extra monthly amount. It uses the same Canadian semi-annual compounding as the examples on this page.
Related guides
Sources
- FCAC: Mortgage fees and prepayment penalties
- FCAC: Renewing your mortgage
- Ratehub: Best 5-year fixed mortgage rates (Oct. 8, 2026)
- Ratehub: Best 5-year variable mortgage rates (Oct. 8, 2026)
Checked October 8, 2026. Rules and rates change, so confirm with your lender or the official page before you act.