Guides / How Mortgage Penalties Work in Canada
How Mortgage Penalties Work in Canada
CompassNorth Editorial Team · Updated September 2026 · 7 min read
Breaking a mortgage before your term ends — to refinance, sell, or switch lenders — almost always triggers a prepayment penalty. For a variable-rate mortgage, that penalty is predictable. For a fixed-rate mortgage, it can run into the thousands, and the way it’s calculated surprises a lot of homeowners.
The two penalty methods
Canadian lenders use one of two calculations, and which one applies depends on your mortgage type:
- Three months’ interest — charged on variable-rate mortgages, and as the minimum on fixed-rate mortgages.
- Interest rate differential (IRD) — charged on fixed-rate mortgages when it works out higher than three months’ interest, which is common when rates have fallen since you signed.
Fixed-rate mortgages are charged whichever of the two is greater. That’s the detail that catches people off guard: the bank isn’t choosing the cheaper option for you.
How the IRD is calculated
In simplified terms, the IRD is: (your current rate minus the lender’s current rate for a term matching your remaining time) × your outstanding balance × (months remaining ÷ 12). The bigger the gap between your rate and today’s rate, and the more time left on your term, the larger the IRD.
One detail matters a lot here: some lenders compare your rate to their posted rate for the comparison term, while others use their discounted rate. Posted-rate comparisons tend to produce a bigger gap — and a bigger penalty. Always ask your lender which rate they use before you rely on an estimate.
Why variable-rate penalties are simpler
Variable-rate mortgages are charged three months’ interest, full stop — there’s no IRD to worry about, because there’s no fixed rate being compared against a moving target. That predictability is one reason some homeowners who expect to move or refinance mid-term prefer a variable rate, even before considering where the rate itself is headed.
Ways to reduce or avoid the penalty
- Ask about porting your mortgage to a new property, which can avoid the penalty entirely if you’re moving.
- Ask your lender about a blended rate instead of breaking the mortgage outright.
- Use your annual prepayment privilege (often 10–20% of the original balance) before breaking, to shrink the balance the penalty is calculated on.
- Time a break close to your renewal date, when the remaining term — and therefore the penalty — is smallest.
Estimate your penalty in under a minute
Enter your balance, rate, and time remaining to see both the three-months’-interest and IRD figures side by side.
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