CostBreaking a fixed-rate mortgage typically costs the greater of three months' interest or the Interest Rate Differential (IRD), which compares your rate to current rates for your remaining term. Variable-rate mortgages usually only charge three months' interest, which is why breaking one is generally far cheaper.
Three months' interest
This is the simpler of the two calculations: roughly three months of interest on your current outstanding balance at your current rate. It's straightforward to estimate and is the only penalty that applies to most variable-rate mortgages, which is a real, concrete advantage variable holds over fixed if there's a real chance you'll need to break the mortgage before term end.
The Interest Rate Differential (IRD)
For fixed-rate mortgages, lenders charge the greater of three months' interest or the IRD — and it's very often the IRD that ends up applying. The IRD roughly compares the interest rate on your existing mortgage to the rate the lender could currently charge on a new mortgage for your remaining term, then charges you the difference over that remaining time. If rates have fallen since you locked in your fixed rate, that gap — and therefore your penalty — can be substantial, since the lender is effectively being compensated for lending you money at a rate now higher than what they could otherwise get.
A worked example showing why the gap matters
$400,000 balance, 2 years remaining, rate dropped 1.5 points since you locked in
| Three months' interest estimate | ~$4,200 |
| IRD estimate (illustrative) | ~$11,500 |
| Penalty actually charged (the greater of the two) | ~$11,500 |
That's nearly a $7,300 difference from what a simple "three months' interest" assumption would suggest — exactly why it's worth getting a real penalty quote from your lender before assuming you know the cost, whether you're refinancing, breaking to renew elsewhere, or selling before your term ends. See your estimate on the mortgage penalty calculator, or check whether refinancing still nets out ahead on the mortgage refinance calculator.