MAKE AN INFORMED DECISION
Mortgage prepayment penalties: what the numbers really mean
Before selling, refinancing or moving your mortgage, confirm the exact cost of breaking the contract. Generic estimates can be misleading because lender calculations and contractual terms differ.
When a penalty may apply
A closed mortgage may impose charges for breaking the agreement before maturity, exceeding permitted extra payments or transferring the loan. An open mortgage typically permits prepayment without a penalty, but other contractual conditions still deserve attention.
Lump-sum prepayment privileges and permitted payment increases vary by lender. Unused annual privileges do not necessarily carry over to another year.
Three months of interest versus an interest rate differential
Some closed mortgages calculate the charge using three months of interest or an interest rate differential (IRD); the contract may use the larger amount. IRD calculations can depend on the original posted rate, contractual discounts, the lender’s comparison rate and the time remaining in the term.
There is no single universal formula that reliably reproduces every lender’s prepayment charge.
An official example from the FCAC
The Financial Consumer Agency of Canada illustrates a $200,000 balance at a 6% annual rate, with 36 months left in the term and an illustrative 4% comparison rate.
| Method | Illustrative amount |
|---|---|
| Three months of interest | $3,000 |
| Illustrative interest rate differential | $12,000 |
| Higher result in the FCAC example | $12,000 |
These are the agency’s educational example figures, not a quotation from your bank or an estimate for your contract.
How to obtain the real payout amount
Ask the lender for a written payout statement or an estimate valid for the intended date. Check early-break penalties, administrative and discharge fees, and whether you can port the mortgage to another home.
A broker can help compare keeping, renewing or replacing financing. The free mortgage calculator estimates mortgage payments, but correctly does not claim to price a lender-specific break penalty without your contract.
Why a lower new rate may not save money
Projected interest savings must be weighed against penalties, transfer costs, and the new loan’s conditions. A lower posted interest rate does not automatically justify breaking an existing mortgage if the charges exceed the benefit.
Official references
Rules reviewed November 4, 2026. Illustrations, not contract estimates or rate commitments.