Breaking Your Mortgage Early in Canada: Penalties, Savings, and the Break-Even Math
Should you break your Canadian mortgage to get a lower rate? Here's how to calculate your prepayment penalty, monthly savings, and break-even timeline before you decide.
Breaking Your Mortgage Early in Canada: Penalties, Savings, and the Break-Even Math
Interest rates change. Your mortgage doesn't — at least not until your term ends. If rates have dropped significantly or your situation has changed, breaking your mortgage early might save money. But the penalty can be substantial, and the math needs to work in your favour.
Two Types of Prepayment Penalties
3-Month Interest — The simpler of the two. Equal to 3 months of interest on your outstanding balance at your current rate. Common for variable-rate mortgages.
Interest Rate Differential (IRD) — The more expensive calculation. The lender estimates how much interest income they'll lose by lending the money out again at a lower rate. Each lender calculates this differently, and the results vary significantly.
Fixed-rate mortgage holders almost always pay IRD, which can be 3–10× more expensive than the 3-month interest alternative.
How Lenders Calculate IRD
Most major Canadian banks use their posted rates (not the discounted rate you actually got) in the IRD calculation, which inflates the penalty. Smaller lenders and credit unions typically use the contract rate, resulting in lower penalties.
The formula (simplified):
Penalty = (Contract Rate − Comparison Rate) × Remaining Balance × Remaining Term
Where the "comparison rate" is the lender's current rate for a term matching your remaining months.
The Break-Even Calculation
Before refinancing, calculate:
- Your penalty (call your lender for the exact amount)
- Monthly payment savings at the new rate
- Break-even months: penalty ÷ monthly savings
If you plan to stay in the home (or keep the mortgage) for longer than the break-even period, refinancing likely makes sense. If you're selling within 2 years, it almost never does.
When Refinancing Makes Sense Without Breaking
- At renewal — No penalty applies. The best time to renegotiate or switch lenders
- Porting — Some mortgages are portable, allowing you to transfer the rate to a new property
- Blending — Adding new borrowing at current rates while keeping your existing rate on the original balance
Try the Calculator
→ Mortgage Refinance Calculator
Official Resources
- FCAC — Prepayment Privileges and Penalties — federal consumer guide on mortgage prepayment
- FCAC — Mortgage Comparison Tool — compare costs of breaking vs. holding
- Financial Consumer Agency of Canada — Your Mortgage — complete FCAC mortgage resource hub
- OSFI — Prepayment Charges — regulatory context for lender penalty calculations