Mortgage prepayment penalty calculator

Breaking a closed mortgage early usually costs the higher of three months' interest or the interest rate differential (IRD). The IRD is where penalties get big, and lenders don't all calculate it the same way. This shows you both common methods.

The starting numbers are the federal government's (FCAC) worked example: $200,000 at 6%, 36 months left, a 4% comparison rate. That gives $3,000 in interest versus a $12,000 IRD, so the penalty is $12,000.

Three months' interest

3 months' interest = amount prepaid × your annual rate × 3 / 12

This is the usual penalty on a variable-rate mortgage, and the minimum on most fixed-rate ones. Some lenders work it out from daily interest, so the actual figure can be a little different.

Interest rate differential (IRD)

IRD = amount prepaid × (your rate − comparison rate) × months left / 12   (zero if the gap is negative)

penalty = the higher of 3 months' interest and the IRD

The comparison rate is where lenders differ. The FCAC describes the two building blocks lenders use:

Current rate method: the comparison rate is the lender's current rate for a term close to what's left on yours. Many smaller lenders and some monoline lenders do it roughly this way.
Posted rate method: the comparison rate is the current posted rate for a similar term minus the discount you got when you signed. Most of the big banks use some version of this. If you got a big discount off a high posted rate, the comparison rate drops and the IRD can be much larger.

Example: you pay 4.0%, the posted rate when you signed was 5.5% (a 1.5% discount), and today's posted rate for a 2-year term is 5.0%. The current rate method gives a gap of 4.0 − 5.0 = below zero, so no IRD. The posted rate method gives 4.0 − (5.0 − 1.5) = 0.5%, so on $300,000 with 24 months left that's $3,000.

The 5-year rule in the Interest Act

Section 10 of the federal Interest Act says that once a mortgage has run more than five years, a borrower can pay it off with no more than three months' extra interest. This matters for terms longer than five years, such as a 7- or 10-year fixed. Tick the box above to apply it.

Ways to cut the penalty

Use your yearly prepayment privilege first. The penalty is then worked out on a smaller amount.
Ask about porting the mortgage to your new home, or a blend-and-extend, instead of breaking it.
If the term ends soon, waiting may cost less than paying the penalty.

This is an estimate for general information. It is not advice about your situation. Check the final numbers with your lender, your real estate lawyer, or the official source.

Sources

Last checked: October 10, 2026