Say you break a $400,000 fixed mortgage at 5.2%, with 30 months left and a comparison rate of 4.1%. The cost is about $11,000. That figure is the interest rate differential, and it beats three months of interest, which is $5,200. Put your own details in above for an estimate.
Two ways to calculate a penalty
On a variable rate mortgage, the penalty is almost always three months of interest. Fixed rates work differently. The lender charges the greater of two amounts: three months of interest, or the interest rate differential (IRD).
Three months of interest
Multiply your balance by your rate, divide by twelve, then multiply by three. On $400,000 at 5.2% the answer is $5,200. Time left in the term makes no difference. None.
How the interest rate differential works
The IRD estimates the interest the lender loses when you leave early. Take your rate minus a comparison rate, multiply by the balance, then by the years left. The comparison rate is what the lender could charge today for a term matching your remaining time. In the example, 1.1 points on $400,000 over 2.5 years gives $11,000.
Why banks differ
Many banks base the comparison rate on their posted rate minus your original discount. Posted rates run high, so the IRD at a big bank can be far larger than at a monoline lender. Ask how your lender sets it, because the number you enter here should come from them.
Ways to avoid or reduce a penalty
Wait for renewal and the penalty disappears. Use prepayment rights to cut the balance first, since a smaller balance means a smaller penalty on either measure. Porting your mortgage to a new home may move the rate across and dodge the penalty. Sometimes a blend and extend, where the lender mixes your old rate with today’s rate and lengthens the term, beats breaking the mortgage altogether.
Portability and assumption
Porting is common. Your rate and remaining term travel with you, and there is no penalty if you close on the new home inside a set window. Ask about the window. A buyer can sometimes assume a seller’s mortgage too. That is uncommon, and it needs lender approval.
Getting a smaller bill
Ask. Have the lender explain each number in the quote, then set the penalty against the interest you would save by leaving. A few months of waiting can trim the IRD, since the time left in the term shrinks. If the quote looks wrong, legal advice may be worth having.
What your contract says
The contract spells out how the penalty is figured. Search it for interest rate differential, comparison rate and posted rate. Where it mentions your original discount, the penalty can far exceed three months of interest. Keep it.
Before you decide
A penalty is only one cost of leaving. Weigh it against the savings using the mortgage refinance calculator. Close to the end of your term? Your renewal options may be the better route.
Frequently asked questions
How is a mortgage penalty calculated?
For fixed rates, it is the greater of three months of interest and the interest rate differential. For variable rates it is usually three months of interest.
What is the IRD?
The interest rate differential is the gap between your rate and a comparison rate, applied to your balance for the time left.
Why is my bank's penalty so high?
Some banks use a posted-rate comparison, which makes the IRD larger.
Can I avoid a mortgage penalty?
Wait for renewal, port the mortgage or use prepayment rights to reduce the balance.
Is the result exact?
No. Only your lender can quote the exact figure, so ask for it in writing.
Does a variable rate have an IRD?
Rarely. Variable rates usually carry a three-month interest penalty.
Sources and updates
Last reviewed: . Full disclaimer. How we build calculators. Editorial policy.
Estimate only. This calculator gives general information for planning. It is not tax, legal or financial advice, and it is not affiliated with the City of Toronto, MPAC or the Canada Revenue Agency. Results depend on the numbers you enter and may differ from official amounts. Check official sources or a qualified professional before you decide.