Breaking Your Mortgage

Breaking a mortgage before the term ends can cost three months of interest — or $20,000. Which one depends on whether your mortgage is fixed or variable, how much time is left, and where rates have moved since you signed. On fixed mortgages lenders charge the greater of three months' interest and an interest-rate differential (IRD); variable mortgages are typically just three months' interest. This calculator estimates both so the larger one never ambushes you at the lawyer's office.

What this calculator answers

It estimates your prepayment penalty two ways — three months' interest and the interest-rate differential — and shows which is larger, since on a fixed mortgage the lender charges the greater of the two. It answers the question to ask before you refinance, sell, or port: what will escaping this mortgage cost, in dollars?

What it deliberately does not cover

This is an estimate built on the standard methods lenders use — confirm which method your contract specifies, because contract wording governs [VERIFY]. It does not use your lender's exact posted rates or the discount math buried in your contract; real IRD calculations compare posted rates and subtract your original discount, and lenders do not all do it identically. It does not account for unused prepayment privileges, porting or blend-and-extend options that could avoid the penalty, or fees some lenders add on top. And it cannot tell you whether breaking is worth it — that depends on what you gain on the other side.

Every input, explained

Current mortgage balance. Enter what you owe today, from your most recent statement — not the amount you originally borrowed. The penalty is calculated on the current balance, which after two years of payments is meaningfully lower than the original principal.

Your contract rate. Enter the actual rate you pay — the discounted rate, not the lender's posted rate. The common error is entering the posted rate from the bank's website, which overstates both calculations.

Time remaining in your term. Enter the months left until renewal — not the amortization. The penalty cares about the term, typically 2 to 5 years, not the 25-year amortization people enter by mistake.

Lender's current rate for a comparable term. For the IRD estimate, enter the lender's current posted rate for the term closest to your remaining time — with 22 months left, use the 2-year posted rate, not the 5-year. The wrong term skews the result.

Fixed or variable. Select your mortgage type — check your agreement, because the penalty regimes are completely different.

How the math works

Three months' interest is straightforward: balance × your rate × 3/12. The interest-rate differential asks how much interest the lender loses because you are leaving a higher rate for today's lower one: roughly balance × (your rate − today's comparable rate) × years remaining. On a fixed mortgage the lender charges whichever is greater. When rates have fallen since you signed, the IRD is usually the bigger number — sometimes dramatically so.

Worked example: $480,000 balance, 22 months left (illustrative figures)

The numbers below are a made-up walkthrough to show the arithmetic — your lender's actual posted rates and discount math will differ. A borrower has a $480,000 balance on a fixed mortgage at 4.80%, with 22 months remaining. The lender's current posted 2-year rate is 4.10%.

Three months' interest: $480,000 × 4.80% = $23,040 in annual interest. Three months is one quarter: $23,040 × 3/12 = $5,760.

Interest-rate differential: Rate difference: 4.80% − 4.10% = 0.70%. Annual differential: $480,000 × 0.70% = $3,360. Time remaining: 22 months = 22/12 = 1.833 years. IRD ≈ $3,360 × 1.833 = $6,160.

The penalty: the greater of $5,760 and $6,160, so roughly $6,160 on a fixed mortgage. Had this been a variable mortgage, the typical charge would be just the three months' interest — about $5,760 — with no IRD at all [VERIFY against your contract].

Notice how the IRD grows when the rate gap widens: had comparable rates fallen two full points instead of 0.70, the IRD would roughly triple while the three-months figure would not move.

The penalty is calibrated to erase any refinancing win

It is tempting to read a lower posted rate as free money — break the old mortgage, pay the penalty, refinance cheaper, come out ahead. The calculator's "net cost of breaking now to chase this rate" line answers that directly, and the answer is almost always disappointing: it compares the interest you'd pay finishing out the term at your contract rate against the interest you'd pay refinancing at today's rate plus the penalty, for the same months remaining. On the $480,000/22-month example above, finishing the term at 4.80% costs $42,240 in interest. Breaking now and refinancing the balance at 4.10% for those same 22 months costs $480,000 × 4.10% × 22/12 = $36,080 in interest, plus the $6,160 IRD penalty — $42,240 in total. Identical, to the dollar. That is not a coincidence: the IRD is arithmetically defined as the rate gap times the balance times the time remaining, which is exactly the amount of interest the lower rate would have saved you. It is built to cancel out.

The three-months-interest penalty is not calibrated the same way, so a small rate gap can leave you worse off. Keep the same $480,000/22-month mortgage but assume rates have only dipped to 4.70% (a 0.10-point gap): the IRD is just $880, so the $5,760 three-months floor applies instead. Finishing the term costs $42,240 in interest; breaking now costs $480,000 × 4.70% × 22/12 = $41,360 in interest plus the $5,760 penalty — $47,120. Breaking would cost $4,880 more than simply riding out the term, even though the new rate is lower. The lesson: a lower posted rate alone is never, by itself, a reason to break — the penalty formula is designed to prevent it from being one. Breaking still makes sense for other reasons (consolidating higher-interest debt, accessing equity you need now, a sale or move that’s happening anyway) — just don’t expect the rate difference alone to pay for the penalty.

Provincial quirks and edge cases

Mortgage penalties are a contract matter, not a provincial one — the same math applies everywhere. The genuinely provincial wrinkle is in Quebec, where many mortgages are structured as hypothecs rather than conventional charges, which can affect discharge fees at payout [VERIFY] — ask your notary. The more universal edge cases: most contracts include annual prepayment privileges, and using them before you break shrinks the balance the penalty is calculated on [VERIFY your contract's terms]. Porting — moving your mortgage to a new property — can avoid the penalty entirely if the lender allows it and timelines line up. And blend-and-extend, where the lender folds your old rate into a new term, is sometimes cheaper than breaking outright. Get the penalty quote and the blend quote side by side before deciding.

Questions to ask a professional

1. Lender or mortgage broker: What is my exact penalty today under each method — three months' interest versus IRD — and which applies to my mortgage?
2. Lender or mortgage broker: Can I port this mortgage to the new property, and what conditions and deadlines apply?
3. Lender or mortgage broker: If I use my full annual prepayment privilege before breaking, exactly how much does the penalty drop?
4. Mortgage broker: Will you waive or reduce the penalty if I re-borrow with the same lender — and is that offer in writing?