Mortgage Penalty Calculator (Canada)

Find out what it would cost to break your mortgage, using live Bank of Canada rates, and whether switching to a lower rate is worth it.

How mortgage penalties are calculated in Canada

Breaking a mortgage before the term ends almost always costs something. In Canada that cost is a prepayment penalty, and it can be anywhere from a few thousand dollars to tens of thousands. The amount depends on your rate, your balance, how long is left in your term, and who your lender is.

Lenders use two methods. Which one applies depends on your rate type.

• Variable-rate mortgages: the penalty is almost always three months’ interest. Take your balance, multiply by your rate, and divide by four.
• Fixed-rate mortgages: the penalty is the greater of three months’ interest or the interest rate differential (IRD).

The IRD is meant to cover the interest your lender loses when you leave early. It compares your rate with a lower comparison rate, then charges the difference on your balance for the time left in your term. When rates have dropped since you signed, the IRD is usually the larger of the two.

Why big bank penalties can be higher

Canada’s big banks work out the IRD using their posted rates, not the rates people actually pay. When you signed, you probably got a discount off the bank’s posted rate. To find the comparison rate, the bank takes today’s posted rate for the time you have left and subtracts that same discount.

Here is an example. Say you signed a 5-year fixed at 4.89% when the posted 5-year rate was 6.49%. That is a 1.60% discount. Three years later, the posted 3-year rate is 6.05%. Your comparison rate becomes 6.05% minus 1.60%, which is 4.45%. On a $400,000 balance, the IRD is $400,000 × 0.44% × 3 years, or about $5,280.

The bigger your original discount, the lower the comparison rate and the bigger the penalty. That is why two people with the same rate and balance can be quoted very different penalties by different lenders.

Most monoline lenders, credit unions and broker-channel lenders compare your rate with what they are actually charging today for a similar term. Depending on today’s rates, that can be thousands less than the big-bank method, or about the same. Switch between “Big bank” and “Other lender” in the calculator to compare.

Where the rates in this calculator come from

Posted rates come from the Bank of Canada, which publishes the typical posted 1, 3 and 5-year conventional mortgage rates offered by Canada’s chartered banks every week. The calculator looks up the posted rate for the month and term you signed, plus today’s posted rate for the time you have left. Two- and four-year rates are estimated between the published terms. Your own bank’s posted rates can be a little different, so you can type in the exact figures from your mortgage paperwork.

The “rate you could get today” starts as an estimate based on the 5-year Government of Canada bond yield, which fixed mortgage rates tend to follow, plus a typical lender margin. A real quote will always be more accurate.

Ways to reduce or avoid a mortgage penalty

• Use your prepayment privilege first. Most mortgages let you pay down 10% to 20% of the original amount each year without penalty. Paying that before you break lowers the balance the penalty is worked out on.
• Port your mortgage. If you are selling and buying, many lenders let you move your existing mortgage to the new home with no penalty.
• Ask about a blend-and-extend. Your lender may blend your current rate with today’s rate and extend your term, instead of charging a penalty.
• Time it close to renewal. The IRD shrinks as your term runs down. In the last few months, three months’ interest is often the larger number, and some lenders let you renew early without penalty within 120 days of maturity.

Is breaking your mortgage worth it?

It comes down to whether the interest you would save at a new rate is more than the penalty plus legal, discharge and appraisal costs. The calculator compares the two over the time left in your term. A small net saving is often wiped out by fees, so it usually only makes sense when the gap between your rate and today’s rates is large, or when you need to refinance anyway to take out equity or consolidate debt.

For a longer walk through the trade-offs, read Breaking a Mortgage in Canada: Penalties, Rules, and Options and our real-world scenario on breaking early for a lower rate.

Mortgage penalty FAQ

Can my lender charge more than this calculator shows?
Yes. Some lenders use the posted rate for the closest shorter term, round the time left differently, or add admin and discharge fees. Your lender’s payout statement is the only exact figure.

Do variable-rate mortgages have an IRD?
Almost never. Nearly every Canadian lender charges three months’ interest to break a variable-rate mortgage.

Is a mortgage penalty tax deductible?
Not on your own home. If the property is a rental, a prepayment penalty can usually be deducted over time as a financing cost. Check with your accountant.

Can a broker help?
Yes. A broker can compare the penalty with what you would save across many lenders, and check whether porting, a blend-and-extend or waiting until renewal works out cheaper. It costs nothing to ask.