Mortgage break penalties in Canada, explained simply

This is the single most expensive piece of fine print in a mortgage, and it is almost never read before signing. Two mortgages at identical rates can produce penalties that differ by thousands of dollars, because the penalty formula is not standardised.

The two formulas

Three months of interest is what it sounds like: roughly a quarter of a year of interest on your balance. On a variable rate mortgage this is usually the whole penalty. An interest rate differential compares the rate you are paying to a comparison rate the lender selects, and charges you the difference over your remaining term.

Why the differential gets large

Because of which comparison rate a lender picks. Some use their current posted rate for the remaining term, some use a discounted rate, and some reconstruct the discount you originally received and apply it. Those choices produce very different numbers on the same mortgage. A fixed mortgage broken early in its term, with a big gap between your rate and the comparison rate, is where the eye-watering figures come from.

The five-year rule

Under section 10 of the federal Interest Act, on a mortgage more than five years old, a borrower can prepay in full with a penalty capped at three months of interest. It applies to the age of the mortgage, not the length of the term, and it is the reason terms longer than five years are less risky than they look.

Reducing it before you break

Use your annual prepayment privilege first, which lowers the balance the penalty is calculated on.
Check whether the mortgage is portable, which can avoid the penalty entirely on a move.
Ask whether a blend and extend achieves what you want without a discharge.
Get the figure in writing from the lender rather than relying on an online estimator.

Always ask the lender for the penalty quote in writing, with the comparison rate they used. The formula in the commitment is the one that binds, not the summary on a statement.