Mortgages
Mortgage Prepayment Penalties in Canada
When you pay a penalty for breaking your mortgage, how lenders calculate it, and how to keep it low.
When do I pay a prepayment penalty?
When you pay more than your prepayment privileges allow, break your contract, move to another lender before the term ends, or pay off the mortgage early, including when you sell.
Open mortgages have no penalty, but higher rates.
Put it into practiceMortgage payment calculatorHow is the penalty calculated on a fixed-rate mortgage?
Usually the higher of three months’ interest or the interest rate differential (IRD). The IRD compares the interest left on your term at your rate with the interest at a lower comparison rate.
FCAC’s example: on a $200,000 balance at 6% with 36 months left and a 4% comparison rate, three months’ interest is $3,000 but the IRD is $12,000, so the penalty is $12,000, possibly plus an administration fee. How the comparison rate is chosen varies by lender and can make a big difference.
What does three months’ interest look like?
Roughly your balance times your rate, divided by four.
| Balance | Rate | Three months’ interest |
|---|---|---|
| Top$300,000 | 4.5% | $3,375 |
| $500,000 | 5% | $6,250 |
The penalty for a variable-rate mortgage is set in your contract; ask your lender how it’s calculated.
How can I reduce or avoid the penalty?
Use your yearly prepayment privileges, time a sale for the end of your term, or port your mortgage to your new home if your contract allows it.
Privileges commonly let you raise your payment by a set percentage or make a lump-sum payment each year; unused amounts usually don’t carry over. Before you sign, compare how lenders calculate penalties, not just their rates.
Keep reading
MortgagesFixed vs Variable Mortgages in CanadaHow fixed and variable rates work, how variable payments react when prime changes, and how to decide which suits you.- MortgagesHow to Renew Your Mortgage in CanadaWhen your lender has to contact you, why you shouldn’t just sign the renewal letter, and what switching lenders involves.
MortgagesThe Mortgage Stress Test in CanadaWhat the stress test is, how the qualifying rate is set, how it affects how much you can borrow, and when it doesn’t apply.
MortgagesDown Payments and CMHC Mortgage Insurance in CanadaThe minimum down payment for any price, what CMHC insurance costs with less than 20% down, and where your down payment can come from.
Official sources and further reading
Terms vary by product. Confirm the provider’s current terms before acting. This guide does not predict approval, realized value or credit-score changes. How WalletReturn calculates value