Mortgage prepayment penalties: IRD and three months' interest
If you break a closed mortgage before the term ends to sell, refinance or switch, you pay a penalty. For fixed rates it can run to tens of thousands of dollars, and the method matters more than the rate.
Figures checked September 24, 2026Three months' interest
Three months of interest on the balance at your contract rate: on $400,000 at 5%, about $5,000. It's almost always the penalty on a variable-rate mortgage, and the floor on a fixed one.
The interest rate differential
The IRD is meant to repay the lender for the interest it loses: the balance, times the gap between your rate and the lender's rate for the time left, times the years remaining.
The big banks compare against their posted rate minus the discount you got, which makes the gap much larger, and the penalty with it. Many monoline lenders compare against their actual discounted rates instead.
Avoiding it
Most mortgages let you prepay 10 to 20% a year without penalty, and porting the mortgage to a new home avoids a penalty when you move. Switching at maturity costs nothing. Ask for the lender's penalty method before you sign, not when you need to leave.
What the law says
Federally regulated lenders must give you a penalty estimate on request. Under the Interest Act, an individual with a term longer than five years can repay after five years with at most three months' interest.
More guides
General information about Canadian mortgages, not financial, legal or tax advice. Lenders and insurers apply their own criteria, and rules change; confirm the details with a licensed mortgage professional before you act.