How much is the penalty for breaking a fixed mortgage?
Breaking a Fixed Mortgage: Are you about to pay thousands? Here’s exactly how much.
Quick answer
For most Canadian fixed-rate mortgages the penalty is the greater of:
- Three months’ interest, or
- Interest Rate Differential (IRD)
That means you pay either a short flat fee (three months’ interest) or the lender’s calculation of lost interest (IRD). Lenders pick the bigger number.
What is IRD and why it matters
IRD stands for Interest Rate Differential. It’s the lender’s estimate of the interest income they lose when you end your mortgage early. It’s usually calculated using:
- Your original contract rate
- The lender’s current posted rate for a similar term
- Your remaining principal balance and remaining term
Simple example: You owe $300,000, your contract rate is 2.5% and the lender’s current 5-year posted rate is 5%. The rate gap (2.5%) times your balance multiplied by the years left gives a rough IRD estimate. Lenders use precise math and present value factors, so the real number can be different. Always get the lender’s written calculation.
When three months’ interest wins
If your contract rate is close to today’s posted rate, the three-month interest penalty will usually be higher. That’s a capped, predictable cost. It’s calculated as: outstanding balance × contract rate × 3/12.
Factors that raise the penalty
- Long time left on the term (more payments left = higher IRD)
- Large outstanding balance
- Big gap between your rate and current posted rate
- Special clauses in your mortgage contract (e.g., fixed-rate IRD formulas)
What you should do right now (action plan)
- Read your mortgage agreement to find the penalty clause. Terms vary by lender.
- Call your lender and request a written prepayment penalty calculation.
- Demand an itemized IRD breakdown. If the math looks opaque, ask for the formula used.
- Compare options: port the mortgage, refinance with the lender, or pay the penalty and switch.
- Talk to a mortgage broker or lawyer if the penalty is large.
Save money when possible
- Porting can avoid penalties if you move and keep the same mortgage with the lender.
- Partial prepayments within allowed limits may reduce balance without triggering IRD.
- Negotiating with your lender or shopping for a limited-break fee may help.
Why this matters to you
A surprise penalty can erase the benefit of a lower rate or a better property deal. Know the numbers before you sign anything. Exact penalties vary by lender and province.
If you want a straightforward, no-nonsense walk-through of your mortgage penalty, get the lender’s calculation and I’ll review it with you. I work with top mortgage brokers and lawyers to find the lowest real cost.
Contact: Tony Sousa — tony@sousasells.ca | 416-477-2620 | https://www.sousasells.ca
Keywords: fixed mortgage penalty, breaking a fixed mortgage, mortgage break penalty, interest rate differential, IRD, three months’ interest, mortgage prepayment penalty, mortgage penalty calculator
