Breaking your mortgage before renewal
Rates dropped, you're selling, or you need to borrow more. Breaking a closed mortgage mid-term is allowed, but it usually comes with a penalty that can run to thousands of dollars.
What the penalty is
On most closed mortgages the penalty is the higher of three months' interest or the interest rate differential (IRD). On variable-rate mortgages it's usually just three months' interest. The FCAC's example: $200,000 left at 6%, 36 months to go, and a comparison rate of 4%. Three months' interest is $3,000 and the IRD is $12,000, so the penalty is $12,000.
The IRD depends on the comparison rate your lender picks. Banks that use posted rates subtract the discount you got when you signed, and that can make the penalty much larger. Our prepayment penalty calculator shows both methods next to each other.
Options that can cost less
- Port the mortgage. If you're moving, many lenders let you take your rate and term to the new home.
- Blend and extend. Your lender blends your old rate with today's rate for a new, longer term, with no penalty but maybe admin fees. The FCAC gives the formula: (old rate × months left + new rate × extra months) ÷ new term in months. For example, 5.5% with 24 months left, blended into a new 60-month term at 4%, gives (5.5 × 24 + 4 × 36) ÷ 60 = 4.6%.
- Use your prepayment privilege first. Paying down the allowed lump sum before you break it lowers the amount the penalty is based on.
- Wait. If renewal is only months away, the penalty may be more than you'd save.
The five-year rule
Under section 10 of the federal Interest Act, once a mortgage has run more than five years, the borrower can repay it with at most three months' extra interest. This protects people with 7- and 10-year terms.
Before you decide
Ask your lender for the exact penalty in writing and how they calculated it. Federally regulated lenders that follow the mortgage prepayment code have to explain the method and the comparison rate. Then compare the penalty with the interest you'd save, using the renew vs switch calculator with the new rate.
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
- FCAC: Mortgage prepayment penalties (3 months' interest vs IRD)
- FCAC: Breaking your mortgage contract (blend-and-extend)
- Interest Act, R.S.C. 1985, c. I-15, sections 6 and 10
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