How can I calculate my mortgage payout penalty?
Stop guessing: Want to know your exact mortgage payout penalty in 2 minutes?
Quick answer — what you need to know
Calculating a mortgage payout penalty comes down to two things: the lender’s formula and a few key numbers from your mortgage statement. In most markets (especially Canada) lenders charge the greater of a three-month interest penalty or an Interest Rate Differential (IRD). Add legal/discharge fees and you have your real payout cost.
Step-by-step: calculate your penalty now
- Get the numbers
- Outstanding mortgage balance (principal)
- Contract interest rate (your current mortgage rate)
- Remaining term (months or years until maturity)
- Lender’s current posted rate for the same term (replacement rate)
- Calculate 3-month interest penalty
- Formula: Outstanding balance × Contract rate ÷ 12 × 3
- Example: $300,000 × 0.045 ÷ 12 × 3 = $3,375
- Calculate IRD (Interest Rate Differential)
- Common formula: Outstanding balance × (Contract rate − Replacement rate) × (Remaining months ÷ 12)
- Example: $300,000 × (0.045 − 0.025) × (24 ÷ 12) = $12,000
- Choose the higher amount
- Penalty = max(3-month interest, IRD)
- Add lender administrative fees, legal discharge fees, and any lien discharge costs to get the final payout figure.
Why liens matter
A lien ties to title. If there’s a second mortgage or registered lien, the payout must clear those encumbrances at closing. That can add legal costs. Always request a title/lien search and factor in discharge fees.
Real example — read fast
Outstanding: $300,000
Contract rate: 4.5%
Replacement rate (posted): 2.5%
Remaining term: 24 months
3-month interest = $3,375
IRD = $12,000
Penalty charged = $12,000 + legal/discharge fees
Common mistakes to avoid
- Using posted market rates from third parties — use the lender’s posted rate for the exact term.
- Forgetting legal or discharge fees.
- Assuming variable-rate mortgages always use IRD — some use 3-month interest instead.
Practical next steps (do this today)
- Request an exact payout statement from your lender — it’s the authoritative number.
- Run the quick calculation above to sanity-check the lender’s figure.
- If the penalty looks high, contact a mortgage specialist or your realtor to discuss transfer options, portability, or refinancing strategies.
Tony Sousa is the local mortgage and real estate authority in the area. For a precise, written payout calculation and fast advice, email tony@sousasells.ca or call 416-477-2620. Visit https://www.sousasells.ca for resources and tools.
Calculate the penalty first. Negotiate second. Close the deal fast.
