Mortgage Prepayment Penalty in Canada: What Breaking Your Mortgage Costs in 2026

Toronto, October 4, 2026 — If you are weighing breaking your mortgage before the term ends, the number that decides it is your mortgage prepayment penalty, and two lenders can charge twice as much as each other on an identical loan. On a $485,000 balance at 5.49% with 24 months left, the three months’ interest method costs $6,657. The discount-adjusted posted-rate method most of the big banks use costs $13,095 on the same mortgage — 5.9 months of interest, not three. With the Bank of Canada policy rate at 2.25% since September 2, prime at 4.45% and the best five-year fixed at 4.34% as of October 2, refinancing out of a 5%-plus contract saves real money. It just does not save enough to clear both of those penalty figures.

What a mortgage prepayment penalty actually is

A closed mortgage is a two-way commitment. You agreed to pay a set rate for a set term, and your lender funded the loan expecting to earn it for the full term. Pay out early and the lender charges a fee to cover the income it no longer collects.

Three situations trigger it: refinancing mid-term, switching lenders mid-term, or selling without porting the mortgage. Renewing at maturity triggers nothing, which is why the renewal window is the cheapest moment to move your business. If your term is ending anyway, read how early you can renew your mortgage in Canada first.

Your mortgage commitment and annual disclosure statement both set out the method your lender uses, and federally regulated lenders must tell you how the calculation is made. Get the figure in writing. A number quoted over the phone is an estimate, usually good for 30 days.

Three months’ interest versus the interest rate differential

Closed fixed-rate mortgages in Canada are charged the greater of two calculations. Closed variable mortgages are almost always charged the simpler one.

Three months’ interest is your balance multiplied by your rate, divided by four. On $485,000 at 5.49%, that is $6,657. On a variable at prime less 0.50%, or 3.95% today, the same balance costs $4,789. It is predictable, and it is the whole penalty on a variable mortgage regardless of how much term is left.

The interest rate differential, or IRD, compares the rate you are paying with the rate your lender could earn today on a term matching what is left on yours. Multiply the gap by your balance and by the years remaining. When rates have fallen since you signed, the IRD is larger — often much larger — than three months’ interest.

The posted-rate method that doubles your mortgage prepayment penalty

Every lender runs an IRD. What separates a $6,000 penalty from a $13,000 one is which comparison rate goes into it.

Lenders that compare against the rate they advertise today produce a modest number. Lenders that compare against their posted rate, then subtract the discount you originally received, produce a much bigger one. Posted is the sticker price almost nobody pays: as of October 4, RBC posts 6.09% on a five-year fixed and 5.54% on a two-year, against a five-year special offer of 5.04%.

Work the same mortgage through all three methods. Assume a five-year fixed signed in late 2023 at 5.49%, taken at 1.40 points off the posted rate of the day. That 1.40-point original discount is an illustrative assumption — historical posted rates are not published in a form we could confirm today, and your own commitment letter will state your actual discount. Everything else below uses rates verified on October 2 to 4, 2026.

Method	Comparison rate	Rate gap	Penalty on $485,000, 24 months left
Three months’ interest	n/a	n/a	$6,657
IRD, current advertised rate	4.94% (two-year special)	0.55%	$5,335
IRD, posted rate minus your discount	5.54% − 1.40% = 4.14%	1.35%	$13,095

A lender on the advertised-rate method charges you $6,657, because three months’ interest is the greater of the two. A lender on the posted-rate method charges $13,095 — 1.97 times as much, for breaking the identical mortgage on the identical day. That $6,438 difference is not a rate difference. It is a contract-wording difference you agreed to years ago.

Advertised-rate IRD is common at the Big Six; posted-rate IRD shows up more often at monolines, trust companies and some insurers. The only way to know which you have is to read your commitment — the same kind of cost buried in a renewal offer people compare on rate alone, covered in switch or stay at renewal.

How the penalty shrinks as your term runs down

The IRD scales with time remaining. Three months’ interest does not. That means there is a crossover point, and past it, waiting costs you nothing extra.

Months left in term	Posted-rate IRD	Three months’ interest	You are charged
6	$3,274	$6,657	$6,657
12	$6,548	$6,657	$6,657
18	$9,821	$6,657	$9,821
24	$13,095	$6,657	$13,095
36	$19,643	$6,657	$19,643
48	$26,190	$6,657	$26,190

On this mortgage the crossover lands at roughly 12 months. Inside the final year of the term the penalty is flat at three months’ interest no matter when you move; with 36 months left, breaking costs almost three times as much. If you are 14 months from maturity, rerunning the calculation at month 12 is sometimes worth more than the rate you are chasing.

Does breaking still pay at today’s rates?

Payments below are calculated on Canadian semi-annual compounding, on a $485,000 balance with 24 years of amortization remaining.

Rate	Monthly payment	Monthly change
5.49% current contract	$3,016.00	—
4.34% best five-year fixed (Oct 2)	$2,702.96	−$313.04
4.19% best three-year fixed (Oct 2)	$2,663.36	−$352.64
3.40% best five-year variable (Oct 2)	$2,459.68	−$556.32

Move to 4.34% and the payment drops $313 a month. Over the 24 months left in the original term, that is $10,850 less interest paid.

Now subtract the penalty. Assume roughly $1,100 in legal, discharge and appraisal costs, which is an illustrative figure rather than a quote — those fees vary by lender and province.

• With a $6,657 three months’ interest penalty: you are ahead about $3,094 over the remaining term.
• With a $13,095 posted-rate IRD penalty: you are behind about $3,345.

Same mortgage, same new rate, same day. One borrower should refinance and one should not. This is why a rate quote alone cannot tell you whether to break, and why the written penalty quote has to come first. Note too that the variable option at 3.40% carries the Bank of Canada’s October 28 decision with it; markets currently lean toward a hold at 2.25%, but that is a market expectation that can change, and our read on the odds is in the October 28 rate hike analysis.

How to cut your mortgage prepayment penalty before you break

The penalty is not always a fixed number. Several levers move it:

1. Use your annual prepayment privilege first. Most contracts allow a 10% to 20% lump sum each year. Put $72,750 — 15% of this balance — against principal before you break, and the IRD base falls with it. The posted-rate penalty drops from $13,095 to $11,131, a $1,964 saving on money you were paying down anyway.
2. Ask whether you can blend instead of break. A blend-and-extend mixes your existing rate with a new one across a longer term and usually avoids the penalty outright. The blended rate is higher than the best rate on the market, so compare the blend against break-plus-penalty rather than accepting it as the obvious answer.
3. Port the mortgage if you are selling. Moving a portable mortgage to the new property avoids the penalty entirely, though most lenders cap the gap between closings at 30 to 120 days and require you to requalify.
4. Check for a bona fide sale clause. Some contracts waive or cap the penalty on an arm’s-length sale but not on a refinance, so sequencing matters if selling is on your horizon.
5. Wait for the crossover. If the IRD is still above three months’ interest, work out the month it drops below and price the delay against the rate you would lose.
6. Recalculate the quote yourself. Ask which comparison rate was used, which term it was matched to, and what discount was subtracted.

What else breaking costs

The penalty is the largest line but not the only one. FCAC lists administration, appraisal, reinvestment and discharge fees, plus repayment of any cash-back you received at origination. That last one catches people: a $5,000 cash-back bonus taken three years into a five-year term is usually repayable on a prorated basis, on top of the penalty.

If you are refinancing to clear higher-rate debt rather than purely to chase a rate, the arithmetic changes again, because the comparison is no longer mortgage rate against mortgage rate. We work that case through in refinancing to consolidate debt.

For context on where fixed pricing comes from: the five-year Government of Canada bond yield closed at 3.62% on October 1, with the two-year at 3.27%. August CPI was 3.0% year over year, with CPI-trim at 1.9% and CPI-median at 2.0%, and the August Labour Force Survey showed employment down 42,000 and unemployment steady at 6.4%. September CPI lands October 19. With rates near 4.34% against contracts signed at 5% to 6%, the refinance question is live this autumn, and the mortgage prepayment penalty is what separates the borrowers who should act from the ones who should wait.

Common questions

Can I avoid the mortgage prepayment penalty by switching at renewal instead?

Yes. There is no penalty for leaving at the end of your term. Most lenders let you shop 120 to 180 days before maturity and hold a rate through to your renewal date, which is the cleanest way to change lenders at zero penalty cost. A switch still involves lender or legal fees, though many lenders cover them on a straight transfer.

Is the penalty smaller on a variable-rate mortgage?

Usually, and more importantly it is predictable. Closed variable mortgages are typically charged three months’ interest only, with no IRD. At 3.95% on a $485,000 balance that is $4,789 whether you have six months or four years left. Fixed-rate borrowers have no such ceiling.

Is the mortgage prepayment penalty tax deductible?

For a principal residence, no. On a property that earns rental income, a prepayment penalty may be deductible or may have to be amortized over the remaining term depending on the circumstances, and the treatment is specific to your situation. Confirm it with an accountant before you count on it.

Before you break anything: get the written penalty quote, confirm which comparison rate your lender uses, and weigh the total cost against what you would actually save. A broker can run the calculation against your own commitment wording and shop the market at the same time.