Mortgage Penalty Calculator (IRD)

How a Canadian prepayment penalty is built

Break a closed mortgage before the end of its term and your lender charges a prepayment penalty. For a fixed rate it is the greater of two numbers, never the sum:

• Three months' interest — your balance times your rate, divided by four. It is simple, predictable, and usually a few thousand dollars.
• The interest rate differential (IRD) — compensation to the lender for the interest it will not now earn, calculated over the months left in your term. It can be ten times larger, or it can be nothing at all.

The IRD only exists when rates have fallen since you signed. If rates have risen, the lender can re-lend your money at a better rate than you were paying, there is nothing to compensate, and you pay three months' interest.

Why the same mortgage produces two very different penalties

Every lender agrees on the words — “the difference between your rate and the current rate for a comparable term” — and then defines them differently. Two conventions dominate the Canadian market.

The posted-rate convention (most big banks)

The comparison rate is today's posted rate for the term closest to the time you have left, minus the discount you originally negotiated. Written out as your commitment letter writes it:

IRD = (your contract rate − (today's posted rate − your original discount)) × balance × months remaining ÷ 12

Work the algebra through and something uncomfortable falls out. Your original discount is your original posted rate minus your contract rate, so the contract rate cancels entirely and the differential reduces to:

original posted rate − today's posted rate

In other words the penalty does not depend on the rate you actually pay. It depends on how far posted rates have moved — and posted rates are set by the lender, sit well above what anyone is charged, and move on their own schedule. That is the mechanism, and it is why bank penalties surprise people.

The discount you negotiated still matters, but not in the way you might expect. It does not change this penalty at all: run the calculator with a contract rate of 4.29% and again at 5.29%, changing nothing else, and the posted-rate IRD is $16,900 both times. What your discount changes is how much worse the bank's method is than a contract-rate lender's. That difference works out to your original discount less the gap between posted and market rates today — so a 2.5-point discount leaves you $11,323 worse off than a monoline on the same mortgage, while a 1.5-point discount narrows it to $2,600. A sharp discount also gives you a low contract rate, which lowers the three-months-interest floor, and that makes it more likely the large IRD figure is the one that governs.

The contract-rate convention (most monolines and credit unions)

Lenders such as MCAP, First National and many credit unions compare your contract rate against the rate that term is genuinely selling for today. No posted rate, no discount subtracted:

IRD = (your contract rate − today's market rate) × balance × months remaining ÷ 12

Same mortgage, same day, same rate movement — frequently a third of the bank figure, and often low enough that the three-months-interest floor takes over instead. The calculator above shows both so you can see the size of the gap before you phone anyone.

If you locked in during 2020 or 2021, your penalty is probably small

Rates rose steeply from 2022 onward. A household that signed a five-year fixed at 1.99% is comparing that against current rates several points higher, which makes the differential negative under either convention. A negative differential is not a refund — it is simply zero, and the three-months-interest floor applies. On a $480,000 balance at 1.99% that is about $2,388. Set the rate type and rates above to your own numbers and you will see the IRD rows collapse to nil.

Variable-rate mortgages

Closed variable-rate mortgages in Canada charge three months' interest and nothing else — there is no IRD, because there is no fixed rate to run a differential against. Switch the rate type above to Variable and the posted-rate fields disappear. One caveat: a handful of lenders treat adjustable-rate products differently, so check the prepayment clause in your commitment letter rather than assuming.

Two ways to make the penalty smaller

Use your prepayment privilege first. The penalty is calculated on the balance outstanding at the moment you break. Most Canadian mortgages allow a lump sum of 10–20% of the original principal each year without charge. Make that payment, then break — the penalty is computed on the reduced balance. On a five-figure IRD this is worth thousands, and it is the single most overlooked move in the whole process.

Ask about porting or blend-and-extend. Porting carries your existing rate and term to a new property with no penalty. Blend-and-extend mixes your existing rate with a current one over a longer term, avoiding the penalty by never formally breaking. Both are worth pricing against a clean break, and both are covered in the renewal and break-even calculator.

What this calculator cannot tell you

It gives you an informed estimate and a sense of the range. It is not a payout quote, and the fine print genuinely varies:

• Which comparison term. Some lenders take the term closest to your remaining time, some always round down to the next shortest term. With 30 months left that is the difference between a two-year and a three-year comparison rate.
• Cash-back clawbacks. If you took a cash-back mortgage, breaking early usually means repaying a prorated share on top of the penalty.
• Whether the penalty can be rolled in. Some lenders let you add it to a new mortgage rather than paying cash, which changes the arithmetic of whether breaking is worth it.
• Legal and appraisal costs if you are switching lenders rather than refinancing in place — often covered by the new lender, but confirm it.

Only a written payout statement from your lender is binding, and it is normally valid for a fixed window — often 30 days. Ask for one before you commit to anything. If the figure it comes back with is far above what you see here, ask which comparison rate and which term they used; lenders are required to explain the calculation, and the explanation is where errors surface.

Once you have a real penalty figure, the next question is whether breaking still pays. The renewal and break-even calculator takes the penalty and works out the month at which a lower rate has paid for it.

Frequently asked questions