Breaking your mortgage early is one of the most expensive mistakes Canadians make—often costing $10,000 to $30,000 or more. Understanding how penalties work before you sign could save you a small fortune.
How Mortgage Penalties Work
When you break a fixed-rate mortgage before its term ends, you pay a penalty to compensate the lender for lost interest income.
The Two Penalty Calculations
Lenders use the higher of:
- Three months' interest - Simple calculation based on your current rate
- Interest Rate Differential (IRD) - Complex calculation that's often much higher
| Calculation | Formula | Typical Amount | ------------- | --------- | ---------------- | 3 months' interest | Balance × Rate × 3/12 | $3,000 - $6,000 | IRD | Balance × Rate Difference × Remaining Term | $10,000 - $40,000+ |
Interest Rate Differential ExplainedIRD compensates the lender for the difference between your rate and current rates: Example Calculation:
IRD Penalty: $400,000 × 1.50% × 3 = $18,000 Why IRD Varies So MuchDifferent lenders calculate IRD differently: |
Lender Type | IRD Calculation | Penalty Level | ------------- | ----------------- | --------------- | Big banks | Posted rate vs current posted | Highest | Credit unions | Contract rate vs current | Medium | Monolines | Contract rate vs current | Lowest | Critical insight: A mortgage with a big bank could have an IRD penalty 3-4× higher than the same mortgage with a monoline lender.
Understand Your Penalty Before SigningGet pre-approved with our team and we'll help you understand penalty implications of each lender's mortgage contract. Variable Rate PenaltiesVariable rate mortgages typically have much lower penalties: |
Rate Type | Penalty | Example ($400K balance, 5% rate) | ----------- | --------- | ---------------------------------- | Variable | 3 months' interest only | $5,000 | Fixed | IRD (if higher) | $15,000 - $30,000 | Strategy: If you think you might break early, variable rate flexibility can be worth the potential rate premium.
Common Reasons for Breaking MortgagesLife Events
Financial Opportunities
When Breaking Makes SenseCalculate the math: |
Factor | Amount | -------- | -------- | Penalty cost | $15,000 | Rate savings over 5 years | $25,000 | Net benefit | $10,000 | Breaking makes sense when savings exceed costs. Our team can run this analysis for you.
Strategies to Minimize Penalties1. Port Your MortgageIf you're moving, you may be able to transfer your mortgage to the new property without penalty. Understand Your Penalty Before SigningGet pre-approved and learn about each lender's penalty policies. Get StartedPorting requirements:
2. Blend and ExtendInstead of breaking, blend your current rate with a new rate for an extended term. Best for: Accessing additional funds while avoiding penalty 3. Wait It OutIf you're within 6-12 months of renewal, waiting may save thousands. Calculate: Penalty cost vs. interest cost of waiting 4. Choose Flexible Products Initially
Lender Comparison: Penalty Policies |
Lender Type | Penalty Fairness | Notes |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Big 5 Banks | Lower | Use posted rate for IRD | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Credit Unions | Medium-Fair | Often use contract rate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Monoline Lenders | Fairest | Contract rate, transparent | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Private Lenders | Varies | Read contract carefully |
What to Ask Before Signing
- How is the IRD calculated?
- What rates are used (posted vs. contract)?
- Can I port to a new property?
- Is blend-and-extend available?
- What are the maximum prepayment privileges?
FAQ
Q: Can I negotiate my penalty?
A: Sometimes. If refinancing with the same lender or in financial hardship, some lenders will reduce or waive penalties.
Q: Is the penalty tax-deductible?
A: Not for your primary residence. For rental properties, penalties may be deductible as a financing cost.
Q: What if I sell my home and buy another?
A: You may be able to port your mortgage to avoid the penalty. Timing and qualification rules apply.
Q: How do I find out my exact penalty?
A: Contact your lender directly for a penalty quote. They're required to provide this information.
Q: Are there mortgages with no penalties?
A: Open mortgages have no penalties but charge higher rates. Some lenders offer "no-frills" products with reduced penalties.
What's Next
Don't sign a mortgage without understanding the penalty implications. Contact our team and we'll help you choose a lender whose penalty policies match your life situation.
Avoid Costly Penalty Surprises
Our team will help you understand penalty implications before you sign.
