Breaking a mortgage before the term ends almost always comes with a prepayment penalty, and depending on how your lender calculates it, that penalty can be surprisingly large. Sometimes it’s still worth paying. A much lower rate, a move, a separation or the need to access equity can all justify breaking a term early.
The key is to know the real number before you decide. This guide explains how penalties are calculated, walks through a worked example, and covers the alternatives worth asking about first.
Why lenders charge a penalty
When you sign a fixed-rate term, the lender funds your mortgage expecting to earn that rate for the full term. If you leave early, especially when rates have dropped, the lender has to re-lend the money at a lower rate. The penalty compensates it for that lost interest.
The two common penalty formulas
How penalties are usually calculated
Three months’ interest
Most variable-rate mortgages
- Balance × your rate ÷ 4
- Predictable and usually smaller
- Also the minimum for most fixed mortgages
Interest rate differential (IRD)
Most fixed-rate mortgages
- Based on the gap between your rate and today’s rate for the remaining term
- Grows when rates have fallen
- Fixed-rate borrowers usually pay the greater of IRD or three months’ interest
The details of IRD vary by lender, which is why two people with the same balance and rate can face very different penalties. Many big banks calculate IRD using their posted rates and the discount you received when you signed, which can make the penalty much larger than a simple estimate. Monoline lenders often use a more straightforward method.
A worked example
Say you have a $400,000 balance at 5.49% fixed with 30 months left on your term, and a comparable rate today is 4.29%.
Illustrative figures on a $400,000 balance.
Penalty vs. savings over the remaining 30 months
That’s the core math: interest saved over the rest of the term, minus the penalty and switching costs. If the result is clearly positive, breaking may be worth it. If it’s close or negative, you’re better off waiting, unless there’s another reason to move.
Good reasons to break early
- Rates have dropped a lot and your penalty is three months’ interest or a modest IRD.
- You’re selling and your mortgage isn’t portable, or the new home doesn’t fit the port rules.
- You need to access equity for renovations, a major expense or debt consolidation at a much lower rate than the alternatives.
- A life change such as a separation requires restructuring the mortgage.
Alternatives to ask about first
Before you pay a penalty
Porting
If you’re moving, many mortgages let you transfer your existing rate and balance to a new home, avoiding the penalty.
Blend and extend
Some lenders will blend your current rate with today’s rate and extend your term, often with no penalty.
Use prepayment privileges first
Making your allowed lump-sum payment before breaking can reduce the balance the penalty is calculated on. Ask your lender if this applies.
Wait for a better moment
If you’re within a year of renewal, the penalty may shrink enough that waiting is cheaper.
Early renewal
Some lenders allow early renewal within 120 days of maturity without a penalty.
Costs beyond the penalty
Other costs of breaking a mortgage
| Cost | Typical amount |
|---|---|
| Discharge or administration fee | About $200 to $500 |
| Legal fees for a new mortgage | Often $800 to $1,500 for a refinance |
| Appraisal | $300 to $600 if required |
| Reinvestment or cashback clawback | Varies; check your contract |
How to get an accurate number
- Ask your lender for a written penalty statement for a specific payout date.
- Ask exactly which rate they use as the comparison rate.
- Get a quote for the new mortgage, including all costs.
- Compare total interest over the remaining term, not just the monthly payment.
Examples use illustrative rates and Canadian semi-annual compounding, and are rounded. They are not rate quotes or advice. Last reviewed September 2026.