Breaking Your Mortgage Early: Penalties to Watch This Year

Breaking your mortgage early can make sense when refinancing, selling your home, or switching lenders—but it can also come with costly penalties if you’re not careful. In today’s mortgage environment, understanding how penalties are calculated is critical before making a move.

Here’s what Canadian homeowners need to know about mortgage break penalties and how to minimize them.

What Is a Mortgage Break Penalty?

A mortgage break penalty is a fee charged by your lender when you end your mortgage before the term expires. Penalties are designed to compensate lenders for lost interest revenue.

The amount depends on:

• Mortgage type (fixed or variable)

• Remaining term

• Interest rate differences

• Lender policies

Variable Mortgage Penalties

For most variable-rate mortgages, the penalty is typically:

• Three months’ interest, or

• A fixed formula set by the lender

Variable penalties are generally more predictable and lower than fixed mortgage penalties.

Fixed Mortgage Penalties: The Big Risk

Fixed-rate mortgage penalties are often calculated using the Interest Rate Differential (IRD), which can result in significantly higher costs.

Factors that affect IRD penalties:

• Your contract rate vs current rates

• Remaining term

• Posted vs discounted rates

• Lender-specific formulas

This is where many borrowers are caught off guard.

Why Penalties Are a Bigger Issue This Year

In today’s environment:

• Rates have moved significantly since many mortgages were issued

• Borrowers are refinancing to reduce payments or consolidate debt

• Lenders’ IRD calculations can vary widely

This makes understanding penalties more important than ever.

Situations Where Breaking a Mortgage Might Make Sense

Even with penalties, breaking your mortgage can be worthwhile if:

• Interest savings exceed penalty costs

• You’re consolidating high-interest debt

• You’re selling or moving

• You’re accessing equity for major expenses

A break-even analysis is essential.

How to Reduce or Avoid Mortgage Penalties

• Use prepayment privileges before breaking

• Consider porting your mortgage

• Time your break close to maturity

• Ask for a penalty estimate in writing

• Work with a mortgage professional

Small strategies can lead to big savings.

Questions to Ask Your Lender Before Breaking

• How is my penalty calculated?

• Is it based on posted or discounted rates?

• Can I port my mortgage?

• Are there blending options available?

Clarity upfront prevents surprises later.

Final Thoughts

Breaking your mortgage early can be a smart move—but only if you fully understand the penalties involved. In many cases, borrowers focus on lower rates while overlooking penalty costs that erase potential savings.

Before making any changes, calculate the full picture and seek professional guidance.