How do I find out my actual prepayment penalty?

Ask your lender. Banks that follow the federal code on mortgage prepayment information provide the actual charge by phone and a written statement on request, including how it was calculated and how long the figure is valid.

Why is my IRD penalty higher than I expected?

The IRD depends on the comparison rate your contract uses. Some contracts compare against posted rates rather than the discounted rate you pay, which can raise the result. Your agreement and your lender's written statement show the method used.

Is blend and extend always cheaper than breaking my mortgage?

Not always. FCAC notes there is no prepayment penalty with blend and extend, but administrative fees may apply and the blended rate may be higher than rates available elsewhere. Compare the total cost of each option over the same period.

Do I pay a penalty if I switch lenders at renewal?

A prepayment penalty applies to transfers before the end of the term. At maturity you can move to another lender, though setup, discharge, appraisal or legal costs may still apply and the new lender will assess your application.

Breaking a Mortgage Early in Canada: Penalties & IRD

Breaking a closed mortgage before the term ends usually means a prepayment penalty. Here is how lenders typically calculate it, what else it can cost, what your lender has to tell you, and the alternatives worth comparing first.

Plans change in the middle of a mortgage term. You might move, separate, see lower rates elsewhere or need to restructure your debt. With a closed mortgage, ending the contract early usually means a prepayment penalty, and FCAC warns that these penalties can be large.

This guide explains when a penalty applies, how lenders usually calculate it, what else it can cost to break a mortgage, and the alternatives worth comparing first.

When a prepayment penalty can apply

According to FCAC, a lender may charge a prepayment penalty if you:

pay more than your contract's allowed extra amount
break your mortgage contract
transfer your mortgage to another lender before the end of the term
pay off the whole mortgage before the end of the term, including when you sell

Your lender may call it a prepayment charge or a breakage cost. An open mortgage can be paid off without a penalty, which is one reason open mortgages usually carry higher rates.

How the penalty is usually calculated

FCAC says the penalty is usually the higher of two amounts:

Three months' interest on what you still owe.
The interest rate differential (IRD).

The lender usually uses the IRD when your mortgage rate is higher than its current rate and you signed your contract less than five years ago. To work out the IRD, the lender compares the interest left on your term at your rate with the interest at a comparison rate for a similar remaining term.

The comparison rate is where borrowers get surprised. Depending on the contract, the lender may start from its posted rate rather than the discounted rate you actually pay, or subtract your original discount from today's posted rate. Two borrowers with the same balance can face very different penalties because their contracts use different methods. FCAC's page includes a worked example, but only your lender can give you the actual figure.

Other costs of breaking a mortgage

The penalty is not the only cost. FCAC lists other charges to ask about:

administration fees
appraisal fees
reinvestment fees
a discharge fee to remove the charge on your property and register a new one
repaying any cash back you received when you took the mortgage

If your mortgage is registered as a collateral charge, switching lenders can also mean repaying or moving every loan secured by that charge, such as a line of credit (Renewing your mortgage).

What your lender has to tell you

A federally regulated lender must explain how it calculates prepayment charges and show the key terms in an information box in your agreement (FCAC). Banks that follow the Code of Conduct on mortgage prepayment information have also agreed to:

give you the actual prepayment charge over a toll-free line, and a written statement on request
show the outstanding balance, your rate, the comparison rate and the remaining term used for an IRD calculation
tell you how long the quoted charge is valid and what could make it change
wait until you confirm that you intend to pay out before taking steps to do so

Ask for the statement in writing before you commit to anything.

Alternatives to breaking the mortgage

Breaking the contract is one option. FCAC describes several others that may cost less, depending on your situation:

Use your prepayment privileges first. A penalty based on a lower balance is usually smaller. Some lenders restrict prepayments close to the date you break the contract, so ask early (FCAC). Our guide to mortgage prepayment privileges explains how those limits work.
Port the mortgage. If you are buying another home, ask whether you can take your current rate and terms with you (FCAC: Choosing a mortgage).
Blend and extend. Some lenders let you extend the term early and blend your current rate with a new one. FCAC notes there is no prepayment penalty with this option, though administrative fees may apply, and your lender must explain how it calculates the new rate (FCAC).
Wait for maturity. If the penalty is large, waiting until the end of the term may be cheaper. Federally regulated lenders must send a renewal statement at least 21 days before the term ends, but FCAC suggests you start shopping a few months earlier (FCAC).
Check other flexibility features. FCAC lists portability, assumability and the type of registration as features that affect your options later.

If you are under financial pressure

If you are struggling to keep up with payments on your principal residence, contact your lender early. FCAC expects banks to offer tailored support to borrowers at risk of mortgage default. If such a borrower sells the home, banks are expected to provide temporary relief, such as waiving prepayment penalties (Paying your mortgage when experiencing financial difficulties).

How to compare your options

Get the written prepayment charge and the calculation method from your lender.
List every other cost: fees, discharge, appraisal, legal costs and any cash back to repay.
Compare the total cost of breaking with blend and extend, porting, and waiting for maturity over the same period.
Check that you would still qualify. FCAC notes you may no longer qualify for a new mortgage under current conditions (FCAC).
If the property earns rental income, ask a qualified accountant how a penalty and related fees are treated for tax purposes. The CRA's Rental Income guide (T4036) explains rental expenses in general, but it is not a substitute for advice on your own return.

The FCAC Mortgage Calculator can help you estimate interest costs under different scenarios.

Where MortgageFree Canada fits

The MortgageFree Canada method treats a mid-term change as a whole-file decision: the penalty, the new structure and how it fits your plan to pay down debt. Files are reviewed through Vine Group Mortgage Brokerage (FSRA Licence #13511), which can compare lender options and timing. If your renewal is coming up, see our rate watch on renewal timing. Every outcome depends on the file and the lender.

This article is general information, not tax, legal or financial planning advice. Confirm any tax questions with a qualified accountant, and confirm legal questions with a lawyer.

This article is general information, not financial, tax or legal advice. Mortgage services are arranged through Vine Group Mortgage Brokerage (FSRA Licence #13511). Tax treatment varies — confirm your situation with a qualified accountant.

Breaking Your Mortgage Early in Canada: Prepayment Penalties, the IRD and Your Alternatives