In short
Breaking a variable-rate mortgage generally costs three months' interest; on a fixed rate, it is the higher of three months and the IRD — balance × rate gap × months remaining ÷ 12. As an example, on $400,000 with a 1.5-point gap and 36 months remaining: an IRD of $18,000, versus $5,000 for three months' interest — 3.6 times more. The trap: several banks compute the IRD on the posted rate minus your discount, which inflates it. The clause is read before signing.
The two formulas: three months' interest, or the IRD
Breaking a mortgage before maturity — to sell, refinance or switch lenders — triggers the penalty in your contract. Variable rate: the rule is simple, generally three months' interest on the balance. Fixed rate: it is the higher of three months' interest and the interest rate differential (IRD) — compensation for the lender's shortfall if rates have dropped since you signed.
The IRD, in simplified form: balance × (your rate − comparison rate) × months remaining ÷ 12. As an example, on a $400,000 balance at 5.0%, with 36 months remaining and a 3.5% comparison rate: 400,000 × 1.5% × 3 years = $18,000. Three months' interest on the same balance: about $5,000. Same loan, same moment — the formula changes everything.
Interactive tool
Your penalty, under both formulas, in 20 seconds
Enter your balance, your rates and the months remaining: the calculator returns three months' interest, the IRD, and the applicable fixed-rate penalty (the higher of the two).
Simplified formula for guidance — every contract has its exact mechanics (comparison rate, rounding to the nearest term). Ask your lender for the official penalty statement before any decision: it is dated and accurate to the dollar.
The trap: which "comparison rate" does your contract use?
The whole IRD battle plays out in the comparison rate. Several big banks use their posted rate for the remaining term, minus the discount they granted you at signing. Since posted rates are artificially high and discounts generous, this mechanism lowers the comparison rate — and inflates the IRD, sometimes twofold versus a calculation on real rates. Many virtual and non-bank lenders compute on their actual rates: at an equal balance, their penalty is often markedly gentler.
The lesson applies before signing, not after: two offers at the same rate are not equal if one carries a posted-rate penalty clause. It is a lender-selection criterion in its own right — and one more reason to have the contracts compared, not just the rates.
Five ways to avoid it — or reduce it
1. Wait for renewal. At the end of the term, no penalty: it is the free moment to switch lenders or refinance. 2. Port the mortgage to the new property: if you sell to buy again, several contracts let you carry rate and balance over — penalty avoided. 3. Use your prepayment privileges just before breaking: repaying the allowed portion (often 10-20%/yr) reduces the balance… and the penalty computed on it. 4. Blend-and-extend: merge your rate with the market rate while extending the term, with no explicit penalty — have it quantified, the cost hides in the blended rate. 5. Negotiate the timing: a few months from maturity, the IRD melts fast (it is proportional to the months remaining) — sometimes, delaying a sale by 60 days saves thousands.
Frequently asked questions
How is the mortgage break penalty calculated?
Variable rate: generally three months' interest on the balance. Fixed rate: the higher of three months' interest and the IRD — balance × (your rate − comparison rate) × months remaining ÷ 12. On $400,000 with a 1.5-point gap and 36 months remaining, the IRD reaches $18,000, versus $5,000 for three months' interest.
Why is the IRD so high at the big banks?
Because several contracts compute the comparison rate from the POSTED rate minus the discount granted at signing — which artificially lowers the comparison rate and inflates the penalty. Lenders that compute on their real rates often produce markedly lower penalties. It is written in the contract: read the clause before signing.
Can I avoid the penalty when moving?
Often, yes: porting lets you carry your rate and balance to the new property, if the contract allows it and within its windows (often 30 to 120 days between sale and purchase). If the new loan is bigger, the added portion is financed at the current rate (blend).
Is paying the penalty worth it for a better rate?
Sometimes: if the interest savings until maturity exceed penalty + fees, breaking pays. It is a precise calculation — the real penalty (ask your lender for the exact statement, valid a few days), the monthly savings, the months remaining — that a mortgage broker runs before recommending anything.
Penalty formulas vary by lender and contract: only your contract's clause and your lender's official statement are authoritative.
Go further
Before breaking anything, have it quantified
Real penalty vs real savings: the math is done to the dollar, contract in hand. Payotte verifies only one mortgage broker per sector, on facts.
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