How penalties are calculated
Fixed vs variable mortgage penalties
Canadian prepayment penalties differ dramatically based on mortgage type and lender.
📋Fixed rate: IRD penalty
The greater of: (1) 3 months' interest, or (2) the Interest Rate Differential — calculated using the lender's posted rate, not your discounted rate. This makes bank IRD penalties often much larger than expected.
📊Variable rate: 3 months' interest
Variable mortgages are always charged exactly 3 months' interest on the balance — predictable and typically much lower than fixed penalties.
🏦Bank vs monoline difference
Banks use inflated posted rates to calculate IRD, making penalties far higher. Monoline lenders (First National, MCAP, etc.) use discounted rates — penalties can be 3–5x lower for the same mortgage.
Common questions
Why is my bank's penalty so much higher than my broker's estimate?
Banks calculate IRD using their inflated posted rate, not the discounted rate you actually received. Monoline lenders use a contract rate or a simple rate differential — leading to penalties that can be 3–5 times lower for identical mortgages.
Can I avoid the penalty by porting my mortgage?
Yes — porting your mortgage to a new property avoids the prepayment penalty entirely. However, you must close on the new property within the lender's allowed window (typically 30–120 days) and re-qualify on the new purchase.
Are mortgage penalties tax deductible?
For rental properties, prepayment penalties may be deductible as a financing cost — spread over the term of the new mortgage. For primary residences, penalties are not tax deductible. Consult your accountant for your specific situation.
More questions
What is a 3-month interest penalty?
Three months' interest is calculated as: (Balance × Annual Rate ÷ 12) × 3. On a $400,000 mortgage at 5%, that's $400,000 × 5% ÷ 12 × 3 = $5,000. This is the minimum penalty for any closed mortgage.
Can I break my mortgage penalty-free?
Only on the maturity date (renewal date), or if you have an open mortgage. Some lenders also allow lump-sum prepayments (typically 10–20% of original balance per year) without penalty.