Your penalty for breaking a mortgage depends less on what you owe than on who you owe it to. Two Ontario homeowners can break the same size mortgage on the same day and get quotes more than $5,000 apart.
Here's the short answer on how a mortgage penalty works in Ontario. On a closed variable-rate mortgage, the penalty for breaking early is usually three months' interest. On a closed fixed-rate mortgage, it's the greater of three months' interest or the interest rate differential (IRD), which is the lender's estimate of the interest it loses over the rest of your term. The IRD is the one that runs into five figures, and the way your lender calculates it matters more than almost anything else in your contract.
What Triggers a Mortgage Penalty?
Breaking the contract before the term ends. That covers more than people expect: selling the house, refinancing to pull equity out, switching lenders mid-term, or paying down a lump sum bigger than your prepayment privilege allows. Renewing at maturity doesn't count. Neither does a payment that stays inside your annual allowance.
Lenders also call it a prepayment charge or a breakage cost. Same thing. The federal Financial Consumer Agency of Canada lists the same triggers.
How Is Three Months' Interest Calculated?
This one's simple. Your balance times your annual rate, divided by 12, times 3.
On $450,000 at a variable rate of 3.85% (prime minus 0.60, with prime at 4.45%), that's $450,000 × 3.85% ÷ 12 × 3 = $4,331. One wrinkle, though. Some lenders run it on prime instead of your discounted contract rate, which pushes that same example to about $5,006. Check which one your contract uses before you assume.
What Is an IRD Mortgage Penalty?
The IRD compares your contract rate with the rate the lender could lend at today for the time you have left. If you're paying 5.89% and the bank can only get 4.89% on a fresh two-year mortgage, it says it's losing 1% a year, so it charges you that 1% on your balance for the months remaining.
Rough version: (your rate minus the comparison rate) × balance × years left. The real formula usually discounts that back to present value and allows for the balance shrinking, so a written payout figure tends to land a little under the back-of-the-napkin number. Close enough to make a decision with.
Look at what drives it. Rates falling since you signed, lots of time left on the term, a big balance. Get all three at once and the number gets ugly fast.
Why Are Big Bank Penalties So Much Higher?
The posted-rate method. Most of the big banks don't compare your rate with what they'd actually give a new client today. They take today's posted rate for your remaining term, then subtract the discount you got when you signed.
Nobody pays posted rates. They're inflated on purpose. But your original discount came off a high posted five-year rate, and subtracting it from today's posted rate for a shorter term drags the comparison rate way down, which widens the gap and inflates the penalty.
Monoline lenders, the ones that only do mortgages and mostly work through brokers, tend to use their actual offered rates instead. Same balance, same months left, smaller number. Honestly, it's the main reason I read the penalty clause before I look at the rate when someone tells me they might sell within three years.
IRD vs 3 Months' Interest: A Worked Example
Say you locked a five-year fixed in fall 2023 at 5.89%, a pretty ordinary rate that year. It's now October 2026. You owe $500,000 and have about 24 months left.
| Method | Comparison rate | Penalty |
|---|---|---|
| Three months' interest | Not used | $7,363 |
| IRD at the lender's offered 2-year rate | 4.89% | $10,000 |
| IRD by the posted-rate method (posted 5.94% minus your original 1.60% discount) | 4.34% | $15,500 |
You pay whichever is greater. At a lender using offered rates, that's $10,000. At a bank using the posted-rate method, it's $15,500. Same mortgage, same day, and a $5,500 gap decided by one paragraph in a contract you signed three years ago. These are illustrations, not quotes, since posted and offered rates move every week or two.
Why a 2022 Mortgage Might Cost Almost Nothing to Break
Flip it around. Someone who locked in at 2.79% in early 2022 is paying a rate well below anything a lender offers now. Today's comparison rate is higher than their contract rate, so the IRD works out to zero and the penalty is just three months' interest.
On $400,000 at 2.79%: $400,000 × 2.79% ÷ 12 × 3 = $2,790. That's it.
So I don't buy the blanket advice that breaking a fixed mortgage is always a disaster. It depends almost entirely on when you signed. Right now the scary penalties belong mostly to people who locked in during 2023 and early 2024, near the peak.
Does Waiting Make the Penalty Smaller?
Usually. The IRD shrinks as the months left shrink, while three months' interest barely moves.
Take the 2023 example at the lender using offered rates. With 24 months left, the IRD is $10,000. With 12 months left and the same rates, it falls to about $5,000, which is now below three months' interest, so the penalty becomes roughly $7,363. Waiting a year saved about $2,600.
There's a crossover point where the IRD drops under three months' interest. Past it, waiting doesn't save you much more until you're close to maturity.
Is It Worth Breaking Your Mortgage for a Lower Rate?
Only when the interest you save beats everything it costs to leave. That's a math question. Not a feeling.
Back to the $500,000 at 5.89%. Moving to 4.34% saves roughly 1.55% × $500,000 × 2 = $15,500 in interest over the two years you had left. Take off a $10,000 penalty and maybe $1,500 for the lawyer, discharge and appraisal, and you're ahead about $4,000. Now run it at the bank charging $15,500. You're behind about $1,500. Breaking makes no sense there at all.
Most of the time when I run this for someone, the answer isn't "break it." It's "blend it," or "wait." Which brings us to the useful part.
Mortgage Penalty When Selling Your House
Selling before your term ends counts as breaking the mortgage, so the lender pays itself the penalty out of your sale proceeds at closing. Unless you plan around it. Most of the questions I get about penalties start with a listing, not a refinance, and the planning has to happen before you sign back an offer, because the closing date is the lever.
Port the mortgage to your next home
Porting carries your rate, term and balance over to the new house, and no penalty is charged. Lenders usually give you somewhere between 30 and 120 days between the sale and the purchase. If the new place needs a bigger mortgage, most lenders blend the extra money in at today's rates. You still have to requalify, so don't assume it's automatic.
Close on your maturity date
If the sale closes on or after maturity, there's no penalty at all. Some lenders also let you pay out penalty-free in the last few months before maturity. Others don't. Check yours before you list.
Selling a few months before the term ends
This is the most common version, and it's usually cheaper than people fear. With only a few months left, the IRD has shrunk so much that the penalty normally falls back to three months' interest. On $400,000 at 4.5%, that's about $4,500. Annoying. Not a reason to turn down the right offer.
Let the buyer take over your mortgage
Some mortgages are assumable with the lender's approval, which means the buyer qualifies and steps into your rate and term. It's rare, and it only works when your rate beats the market, but with 2022 rates still on the books it's worth asking. Get a lawyer to confirm you're released from the old mortgage once it's done.
Use your prepayment privilege before closing
Paying down your allowance a month or two before closing shrinks the balance the penalty is calculated on. Ask your lender first, since some won't let you use it in the same year you pay out.
How to Avoid a Mortgage Penalty
Not selling? Refinancing, switching lenders and big lump-sum payments are where the rest of the penalties come from, and you have three moves before you break anything.
Pay down with your prepayment privilege first
Most closed mortgages let you pay down 10% to 20% of the original amount once a year with no charge. Ask whether you can use it right before the payout, because then the penalty gets calculated on a smaller balance. Some lenders won't allow it in the same year you pay out. Get that answer in writing.
Blend and extend instead of breaking
Need equity out or a longer term? A blend and extend mixes your old rate with today's rate and resets the term, usually with no penalty. It isn't always the cheapest route, but it often is, and I compare it against a second mortgage and a HELOC in my guide on tapping your home equity without breaking your low rate.
Pick the penalty method before you sign
If there's any real chance you'll sell, separate or refinance inside five years, the penalty method deserves as much weight as the rate. A rate that's 0.10% lower can cost you far more than it saves if the posted-rate method kicks in during year three. This is one of the places a broker actually earns their keep, and I lay out the rest of the trade-offs between your bank and a broker separately.
Ask your lender for a written payout statement for a specific date, not a verbal estimate. Ask which method they used, what comparison rate went into it, and whether discharge, admin or reinvestment fees are added on top.
What About Mortgages Longer Than Five Years?
Federal law caps the penalty. Under section 10 of the Interest Act, once a mortgage with a term longer than five years passes its fifth anniversary, an individual borrower can pay it off with no more than three months' interest as the penalty. So on a seven- or ten-year fixed, the IRD can only bite in the first five years. Corporations and some business borrowers don't get this protection.
How Do You Get Your Exact Penalty Number?
Call your lender or check its online penalty estimator, then ask for the written payout statement. Federally regulated lenders have to disclose how they calculate the charge, so you're entitled to see the method and the rates they plugged in. You can rough out the savings side with my mortgage comparison and prepayment calculator.
Then send it to me. I'll check the math and put it next to the alternatives: break, blend, port, or sit tight for a few months. Sometimes the right move really is waiting four months.
My Take
Don't break a mortgage on rate alone. Get the payout statement, do the break-even math, and look at blending before you look at breaking. And if you're signing a new fixed term this year, ask about the penalty method before you ask about the rate. That clause decides whether a life change in year three costs you $7,000 or $15,000.
If this sounds like your situation, send me your payout statement and I'll tell you straight whether breaking makes sense. Renewing instead of breaking? My renewal and refinance guide covers switching lenders and what to do when the letter arrives.
Common Questions
How much is the penalty to break a mortgage in Ontario?
On a closed variable-rate mortgage it's usually three months' interest. On a closed fixed-rate mortgage it's the greater of three months' interest or the interest rate differential (IRD). On a $500,000 fixed mortgage with two years left and rates down about 1% since signing, the IRD can run $10,000 or more, and higher at banks that use the posted-rate method.
What is the interest rate differential (IRD) on a mortgage?
The IRD is the lender's estimate of the interest it loses when you break a fixed-rate mortgage early. It's roughly the difference between your contract rate and the lender's current rate for your remaining term, applied to your balance for the time left on the term.
Why is my bank's mortgage penalty higher than other lenders'?
Most big banks use the posted-rate method. They subtract your original discount from today's posted rate for your remaining term, which lowers the comparison rate and makes the IRD bigger. Lenders that use their actual offered rates usually produce a smaller penalty on the same mortgage.
Can I avoid a mortgage penalty when I sell my house?
Often, yes. You can port the mortgage to your next home, time the closing to your maturity date, use your annual prepayment privilege to shrink the balance first, or in some cases have the buyer assume the mortgage with the lender's approval. Check your lender's rules before you list.
What is the penalty for selling a house before the mortgage term ends?
It's the same prepayment penalty as breaking the mortgage any other way: three months' interest on a variable, or the greater of three months' interest or the IRD on a fixed. If only a few months are left on the term, the IRD is usually small, so the penalty often falls back to three months' interest. Porting the mortgage to your next home avoids it.
Does a mortgage penalty get smaller over time?
The IRD usually does, because it's based on the months left in your term. Three months' interest stays roughly the same. Once the IRD falls below three months' interest, the penalty stops dropping in any meaningful way until you're near maturity.
Is there a penalty after five years on a seven- or ten-year mortgage?
It's capped. Under section 10 of the federal Interest Act, an individual borrower with a term longer than five years can pay off the mortgage after the fifth anniversary with a penalty of no more than three months' interest.