Mortgage prepayment penalty in Canada: how it is calculated and how to lower it
Quick summary
If you break a closed mortgage early, the Financial Consumer Agency of Canada (FCAC) says the penalty is usually the higher of three months' interest or the interest rate differential (IRD). An open mortgage can be broken without a prepayment penalty. See alsomortgage renewal in Canada.
Checked November 3, 2026. Main source: FCAC: Mortgage fees, prepayment penalties (modified Oct. 15, 2025). See all 2 sources.
Key facts
- How it is worked out
- Usually the higher of three months' interest or the interest rate differential
- Source: FCAC, modified Oct. 15, 2025
- Open mortgage
- Can be broken without a prepayment penalty
- Source: FCAC, modified Oct. 15, 2025
- FCAC example
- $200,000 at 6% with 36 months left: about $3,000 vs about $12,000, so the penalty is $12,000
- Source: FCAC, modified Oct. 15, 2025
How the penalty is worked out
The FCAC says the penalty will usually be the higher of two amounts: three months' interest on what you still owe, or the interest rate differential (IRD).
The IRD compares the total interest left on your term at two rates. The FCAC says lenders typically use the IRD when your rate is higher than the current rate and you signed less than 5 years ago. The rates compared can be the posted rate or your contract rate against a current posted rate for a similar term.
The FCAC worked example
| Item | Amount |
|---|---|
| Balance owing | $200,000 |
| Your rate | 6%, with 36 months left in a 5-year term |
| Current posted rate for 36 months | 4% |
| Three months' interest | About $3,000 |
| IRD | About $12,000 |
| Penalty you pay | $12,000 (higher of the two), and an administration fee may also apply |
Source: FCAC, modified October 15, 2025. The page does not split fixed and variable mortgages, so check your contract.
Other costs of breaking a mortgage
- Administration, appraisal, reinvestment and mortgage discharge fees.
- You may have to repay any cash back you got.
- An open mortgage can be broken without a prepayment penalty. A closed mortgage normally carries one.
Ways to lower the penalty
- Use your yearly prepayment privilege, which lowers the balance the penalty is based on.
- Make a lump-sum prepayment before you break the mortgage. Some lenders limit prepayments close to the break date.
- Wait until the end of the term to prepay large amounts, when penalties usually do not apply.
- Ask whether you can port the mortgage to a new home.
- Shop around at renewal for more flexible options.
What to ask your lender
- Can I break my contract, and what is the prepayment penalty?
- What are the administration, appraisal, reinvestment and discharge fees?
- Would I have to repay any cash back?
- How do you work out the blended rate for a blend-and-extend?
- Will you cover some of the fees if I stay or switch to you?
The FCAC says lenders must explain how they calculate penalties, and the details must be in the information box at the start of your mortgage agreement. Federally regulated banks often have online penalty calculators.
Blend-and-extend, with the FCAC example
Instead of paying a penalty, you can sometimes blend your old rate with a new one. The FCAC's simplified formula: multiply your current rate by the months left, add the new rate times the extra months, and divide by the new term. Its example is 24 months left at 5.5% and a 60-month term at 4%: (24 × 5.5 + 36 × 4) ÷ 60 = 4.6%.
Questions people ask
How is a mortgage prepayment penalty calculated?
Usually the higher of three months' interest or the interest rate differential, according to the FCAC.
Do open mortgages have a penalty?
No. The FCAC says an open mortgage can be broken without a prepayment penalty.
Can I avoid the penalty?
You can lower it by using prepayment privileges, prepaying at the end of the term, or porting the mortgage.
Where do I find my penalty details?
In the information box at the start of your mortgage agreement, which lenders must provide.