Short answer: variable-rate mortgages typically charge a flat penalty of three months' interest to break early. Fixed-rate mortgages use an Interest Rate Differential (IRD) calculation instead, which can run into the thousands, sometimes tens of thousands, depending on how much time is left on your term and how rates have moved since you signed.
Variable-Rate Penalties: The Easy One
Breaking a variable-rate mortgage is straightforward: most lenders charge three months' interest on your current balance, calculated at your existing rate. On a $400,000 balance at 5.5%, that's roughly $5,500, predictable and easy to calculate yourself before you call your lender.
Fixed-Rate Penalties: Where It Gets Expensive
Fixed-rate mortgages use the Interest Rate Differential, or IRD, method. Your lender compares your contract rate to their current posted rate for a term matching however much time you have left, then charges you the difference between those two rates, applied to your balance, for the remaining term.
The IRD calculation gets expensive specifically when rates have dropped since you signed your mortgage, because the gap between your (higher) contract rate and the lender's (lower) current rate is what gets charged. The more time remaining on your term and the bigger that rate gap, the larger the penalty.
A Simplified Example
- Mortgage balance: $400,000
- Your contract rate: 5.5%, with 3 years remaining on a 5-year term
- Lender's current 3-year rate: 4.0%
- Rate differential: 1.5%
- Approximate IRD penalty: $400,000 × 1.5% × 3 years ≈ $18,000
This is a simplified illustration, actual lender formulas vary and often use their own discount rates, not the posted rate, which can push the real number even higher. Always get the exact figure in writing from your lender before making a decision.
When Breaking Your Mortgage Still Makes Sense
- Refinancing at a much lower rate that saves more over the remaining term than the penalty costs
- Switching lenders for better terms where the new lender covers some or all of your penalty as an incentive
- Selling and not porting your mortgage to a new property when portability isn't available or doesn't fit your new purchase
In all three cases, the decision comes down to comparing the penalty against the actual savings, not just the sticker shock of the penalty number itself.
Get Your Real Penalty Number Before Deciding
Your lender can provide an exact penalty quote on request. We'll help you interpret it and run the real math against your options. Talk to Sean before you commit either way.