Breaking your mortgage (penalty)
Estimate your prepayment penalty using your lender's IRD method. Big banks tend to use posted-rate IRD (larger); monolines + brokers use discounted-rate IRD (smaller).
Your scenario
Result
Lenders apply slightly different conventions on the comparison rate. Always request a written payoff quote before deciding.
Why your break penalty depends on the contract you signed
Canadian fixed-rate mortgages use the GREATER of two calculations to determine the prepayment penalty: 3 months interest, or Interest Rate Differential (IRD). The IRD math is where lenders diverge wildly — the same broken mortgage at two different lenders can produce penalties differing by $15,000 or more.
Posted-rate IRD (big-bank style)
RBC, TD, Scotia, BMO, CIBC historically use posted rates. The lender uses your contract rate, the posted rate at signing, and today's posted rate to derive a comparison rate — then applies the spread across your remaining months. Because posted rates are typically much higher than what borrowers actually pay, the implied spread is large, producing large penalties.
Discounted-rate IRD (monoline + broker)
First National, MCAP, Merix, Equitable, and most broker-channel monoline lenders use today's discounted rate for an equivalent remaining term. Because today's discounted rate is closer to your contract rate, the implied spread is small and the IRD often falls below the 3-month interest floor — meaning your penalty defaults to 3 months interest.
Worked example
A $500,000 mortgage at 4.84% with 36 months remaining, refinancing in a falling-rate environment:
- Posted-rate IRD (big bank): ~$22,000-$28,000 typical
- Discounted-rate IRD (monoline): ~$6,000-$8,000 typical
- 3-month interest floor: ~$6,050
BMO Smart Fixed — the outlier
BMO's Smart Fixed product uses BOND-YIELD-BASED IRD, which is dramatically smaller than either posted or discounted IRD. If you might break early, the rate premium on Smart Fixed (typically 10-25 bps) often pays for itself many times over.
What to do before breaking
- Get a WRITTEN payoff quote from your lender — verbal numbers are not enforceable
- Compare it against this estimate to confirm you understand which method they're using
- Run our refinance savings calculator to confirm the new rate covers the penalty
- Negotiate — same-lender refinances sometimes get the penalty waived or reduced
- Consider porting + blending instead — see our blended rate calculator
Related
Questions about this calculator
- How is a mortgage prepayment penalty calculated in Canada?
- On a variable-rate mortgage it is normally three months' interest. On a fixed-rate mortgage it is the greater of three months' interest or the interest rate differential, and the IRD is usually far larger. Which one applies, and how the IRD is computed, is set by your mortgage contract.
- What is the interest rate differential?
- It is the lender's estimate of the interest it loses by you leaving early — roughly your remaining balance times the gap between your rate and a current comparison rate, over your remaining term. The comparison rate the lender uses is the whole game, and it differs by lender.
- Why do the big banks charge so much more?
- Most large banks compute the IRD against their posted rate rather than their discounted rate, which inflates the differential dramatically. Monoline lenders more often use the actual contract rate. On the same balance and term, the difference between the two methods routinely runs into five figures.
- Can I avoid the penalty?
- Sometimes. Porting the mortgage to a new property carries it over intact. Using your annual prepayment privilege first reduces the balance the penalty is calculated on. And a blend-and-extend keeps the mortgage alive at a blended rate rather than breaking it. Ask for all three quotes in writing.