Mortgage Break Penalty: IRD vs 3 Months' Interest Explained (2026)
Breaking a fixed mortgage is the greater of three months’ interest and the rate differential. On $400,000 at 5.2% with two years left: $5,200 or $5,600–$7,300.
Breaking a mortgage before the term ends costs a prepayment charge. On a variable mortgage it is three months' interest: $5,200 on a $400,000 balance at 5.2%. On a fixed mortgage it is the greater of three months' interest and the interest rate differential (IRD), the interest the lender loses by relending your money at today's lower rate for the rest of the term. Using the simple formula, the IRD on that mortgage with two years left and current rates near 4.3% is about $7,300. Big banks calculate IRD from their posted rates, which can push the same penalty higher or lower depending on the discount you received; get the lender's own quote before deciding anything.
Figures come from the CostToClose breaking-your-mortgage calculator, which shows the simple method and flags where a posted-rate method may differ.
The two calculations
Three months' interest: balance × rate ÷ 4. $400,000 × 5.2% ÷ 4 = $5,200.
IRD, simple method: balance × (your rate − the lender's current rate for a term matching your remaining time) × years remaining. $400,000 × (5.20% − 4.29%) × 2 = $7,280.
IRD, posted-rate method (most big banks): the comparison rate is the lender's posted rate for the remaining term minus the discount you got off the posted rate when you signed. If you signed at 5.20% when the posted five-year rate was 6.99% (a 1.79% discount), and today's posted two-year rate is 6.29%, the comparison rate is 6.29% − 1.79% = 4.50%, and the IRD is $400,000 × 0.70% × 2 = $5,600. Because posted rates are inflated and the discount is subtracted, this method produces very different results from the simple one, sometimes lower, often much higher when posted rates for short terms are low.
Monoline lenders and most credit unions use the simple method on their real rates. That difference alone is a reason to ask about the penalty formula when choosing a lender, not just the rate.
When the penalty applies
- Selling without porting the mortgage to the new home.
- Refinancing to a new lender before maturity.
- Refinancing with the same lender (often reduced or waived through a "blend and extend").
- Paying off more than the annual prepayment privilege (typically 10% to 20% of the original principal per year).
It does not apply at maturity, to prepayments within the privilege, or when you port and the new mortgage is at least as large.
Worked example from the calculator
Borrower sells in year three of a five-year fixed: balance $400,000, rate 5.20%, 24 months remaining.
| Method | Penalty |
|---|---|
| Three months' interest | $5,200 |
| IRD, simple, comparison rate 4.29% | $7,280 |
| IRD, posted-rate method, comparison rate 4.50% | $5,600 |
| Charged: greater of three months and the lender's IRD | $5,600 to $7,280 |
| Same mortgage, variable | $5,200 |
If the borrower instead ports the mortgage to the new purchase, the penalty is zero and the rate is blended on any new money. Reproduce this.
How to reduce it
- Port the mortgage to your next home (30 to 120 days between sale and purchase at most lenders).
- Use your prepayment privilege first. Pay the 10% to 20% lump sum the day before breaking; the penalty is then calculated on the smaller balance.
- Time it. Penalties shrink as the term runs down; six months can be worth thousands.
- Blend and extend with the current lender instead of leaving.
- Ask for the quote in writing. Lenders must provide it, and the FCAC requires a written explanation of the calculation on request.
Who this covers
This is for a standard registered fixed or variable mortgage from a bank, monoline lender, or credit union. It doesn't cover a collateral charge mortgage or a readvanceable/HELOC product, both of which can calculate the break cost differently, often higher.
What this doesn't include
- Your specific lender's actual posted-rate table. The posted-rate IRD example above uses illustrative figures to show how the method works, not today's real posted rates at any particular bank.
- Collateral mortgage penalty rules. A mortgage registered as a collateral charge can have a different, sometimes larger, break cost than the standard-charge examples shown here.
- A minimum penalty floor or cap some lenders apply regardless of what the formula produces.
- The actual pricing of a blend-and-extend offer at your lender. This page names it as an option but doesn't calculate what your blended rate would be.
Questions worth asking a professional
- Ask your lender for the exact penalty quote in writing. They're required to provide it, and it may differ from this page's simple-method estimate.
- Confirm whether your mortgage is a standard charge or a collateral charge, since collateral charges can carry different or higher break costs.
- Ask whether blend-and-extend is available on your file and what the effective new rate and term would be.
- If you're planning to sell and buy again, ask specifically about your lender's porting window and conditions before assuming the break will be penalty-free.
Frequently asked questions
How is a mortgage penalty calculated in Canada?
Variable: three months' interest. Fixed: the greater of three months' interest and the interest rate differential. Lenders must disclose the method in the mortgage agreement and explain the figure on request.
Why is my IRD penalty so high?
Most big banks compute IRD using posted rates minus your original discount, which can make the differential far larger than the gap between real rates. Ask for the calculation.
Can I avoid the penalty when I sell my house?
Yes, by porting the mortgage to your new home within the lender's window, or by having the buyer assume it (rare and lender-dependent).
Is the penalty tax deductible?
Not on your own home. On a rental property it may be deductible or added to the cost base; ask your accountant.
Do credit unions charge IRD?
Most do, but usually with the simple method on actual rates rather than posted rates, which tends to produce a smaller penalty.
Sources
- Financial Consumer Agency of Canada, Mortgage prepayment penalties and the prepayment disclosure requirement — checked 14 Sept 2026
- Canadian Bankers Association, mortgage prepayment charge calculators (member banks) — checked 14 Sept 2026
- Bank of Canada, conventional mortgage rate series — checked 14 Sept 2026
This guide gives general information for Canadian home buyers and sellers, checked against the sources listed above on the date shown. It is not legal, tax, or mortgage advice. Because rules and rates change, confirm current figures with your lawyer or notary, your lender, or the government office that administers the tax before relying on them.