Most people only find out how their mortgage penalty works on the day they need to pay it, usually in the middle of a sale or with a better rate in front of them. The calculator above estimates it the way lenders do, using real posted rates rather than guesses, and the guide below explains the one part of the formula that decides most of the number.
Two penalties, and which one you'll get
Break a closed variable-rate mortgage and the penalty is almost always three months' interest. On a $600,000 balance at 3.95%, that's $5,925. It's predictable and it doesn't change much from month to month.
Break a closed fixed-rate mortgage and the lender charges the greater of three months' interest and the interest rate differential, or IRD. The IRD is meant to cover the interest the lender loses because you're leaving before the term is up. Open mortgages have no penalty at all, but they carry a much higher rate, which is why almost nobody holds one for long.
The calculator's default is a common setup. It's a $612,000 balance at 4.79% on a 5-year fixed from a big bank, signed in September 2024, with 36 months left. Three months' interest comes to $7,329, and the IRD comes to $9,914, so the penalty is $9,914. The next section shows where that figure comes from.
How the big banks calculate IRD
The big banks, and some credit unions, use what's called the posted-rate method. Posted rates are the rates a bank publishes on its website. Almost nobody actually borrows at them.
On September 29, 2026, RBC's posted 5-year fixed was 6.09%, while the best insured 5-year rates in the market were around 4.3%. The formula runs in four steps:
- Take the posted rate for your term on the day you signed. In September 2024, the typical big-bank posted 5-year rate was 6.59%, according to the Bank of Canada's weekly series.
- Subtract your actual rate from it to get your discount. For the default mortgage that's 6.59% minus 4.79%, a 1.80% discount.
- Find today's posted rate for the term closest to your remaining time. With 36 months left, that's the 3-year rate, and RBC's posted 3-year is 6.05%. Take your discount off it: 6.05% minus 1.80% gives a comparison rate of 4.25%.
- The IRD is your rate minus the comparison rate, times your balance, times the years left. That's 4.79% minus 4.25%, which is 0.54%, times $612,000, times 3 years: $9,914.
Now look at what cancels out. Your discount gets subtracted in step 2 and added back in step 3, so it has no effect on the result. With a bit of algebra, the whole calculation reduces to this:
Posted-rate IRD = balance × (posted rate for your term when you signed − today's posted rate for your remaining term) × years left
For the default: 6.59% minus 6.05% is 0.54%, and 0.54% × $612,000 × 3 = $9,914. Whether you negotiated a great rate or a mediocre one doesn't matter. What matters is how far the bank has moved its own posted rates since you signed, for the term that matches your remaining time.
This is why big-bank penalties feel arbitrary. The inputs aren't market rates. They're a rate table the bank controls, and banks don't move every term's posted rate by the same amount at the same time.
The calculator fills in the posted rate at signing from Bank of Canada data for 1-, 3- and 5-year terms. For today's rates it uses RBC's current posted table as a stand-in. Other big banks publish similar, but not identical, tables, so swap in your own lender's numbers for an exact figure.
Why waiting a few months can cost you more
Here are RBC's posted fixed rates on September 29, 2026:
| Term | 1 year | 2 years | 3 years | 4 years | 5 years |
|---|---|---|---|---|---|
| Posted rate | 5.64% | 5.54% | 6.05% | 5.99% | 6.09% |
Look at the 2-year rate. It's half a point below the 3-year. Most banks compare your remaining time to the closest posted term, so the moment your remaining time drops from about three years to about two and a half, the comparison switches from the 3-year rate to the 2-year rate. At that point the gap in the formula nearly doubles.
| Months left (default mortgage) | Comparison term | Penalty |
|---|---|---|
| 36 | 3-year | $9,914 |
| 31 | 3-year | $8,451 |
| 30 | 2-year | $15,870 |
| 24 | 2-year | $12,536 |
| 19 | 2-year | $9,816 |
| 18 | 1-year | $8,395 |
| 13 | 1-year | $6,975 (three months' interest) |
Between 31 and 30 months left, the penalty goes up by about $7,400. If you're selling, that turns the completion date into a money decision. In BC, completion dates are negotiated in the contract, and a few weeks either way can cost or save you the price of a used car.
The chart in the calculator draws this curve for your numbers. Some banks always round down to the shorter term instead of the closest one, which moves the jump earlier. Switch the matching rule under "lender details" to see what that does.
Monoline and credit union IRD
Most monoline lenders, which only do mortgages, and many credit unions use a contract-rate method instead. They compare your actual rate with their current actual rate for your remaining term. No posted rates are involved.
Run the default mortgage through that method and the comparison rate is roughly today's 3-year market rate of about 4.19%. That gives 4.79% minus 4.19%, or 0.60%, times $612,000 times 3 years: $11,016. So on the same 4.79% rate, the contract method comes out higher than the bank's formula this time.
That surprises people, because "big banks have the worst penalties" gets repeated everywhere. The honest version is more specific. The posted-rate method depends on a rate table the bank sets, so it swings from reasonable to brutal as your remaining time crosses term boundaries. The contract-rate method depends on real market rates, so you can predict it from public information.
The other difference is what you'd have paid in the first place. In September 2024 the best 5-year fixed rates were around 4.1% to 4.3%, while big-bank rates averaged closer to 4.7%. Say someone took 4.29% from a monoline that month. With today's 3-year rate near 4.19%, their IRD would be tiny, so they'd simply pay three months' interest, about $6,564.
The five-year rule for 7- and 10-year terms
Section 10 of the federal Interest Act caps the penalty on longer terms. Once a mortgage with a term longer than five years is five years old, an individual borrower can pay it off with no more than three months' interest.
On a $500,000 balance at 5.29%, that's $6,612, whether there are two years left or five. Before the five-year mark, a 7- or 10-year term can carry a very large IRD, because the formula multiplies the rate gap by every year you have left. The calculator applies the cap automatically once a long term passes its fifth anniversary.
Three BC sellers, three very different numbers
The same home sale can come with a penalty of a couple of thousand dollars or close to twenty thousand. It depends on when you signed, what you signed and who you signed it with. Here are three situations we see regularly, all priced as of late September 2026.
A Surrey townhouse, 5-year fixed from a big bank, signed October 2023. That was close to the top of the rate cycle. The typical posted 5-year rate was 7.04%, and this owner negotiated 5.99%. There's $540,000 left and 25 months to go, so the bank compares against its posted 2-year rate of 5.54%. The gap is 7.04% minus 5.54%, which is 1.50%. Over a little more than two years, that works out to a penalty of about $16,875. Three months' interest would have been about $8,100. For owners who signed in 2023, these are the numbers that make porting or careful timing worth real money.
A Burnaby condo on a variable rate. This owner has a $480,000 balance at prime minus 0.50%, which is 3.95% today. Three months' interest is about $4,740. It's the same this month as it'll be next spring, give or take the shrinking balance and any move in prime. For people who expect to sell within a few years, that predictability is the main argument for variable.
A Langley house on a 10-year fixed from 2020. This owner locked in at 2.49% six years ago and has $420,000 left. The term is longer than five years and the mortgage is more than five years old, so the Interest Act limits the penalty to three months' interest: about $2,615. Before the fifth anniversary, the same mortgage could have carried a far larger IRD, because the formula multiplies by every year left.
A note on the first case. The same owner on a contract-rate lender, at the same 5.99%, would face roughly $20,250. That's because today's actual 2-year rates sit well below 5.99%. At the 5.49% or so a monoline might have offered that month, it would be about $14,600. The formula matters, but so does the rate you signed at.
Is breaking for a lower rate worth it?
The question isn't whether the new rate is lower. It's whether it's lower by enough, for long enough, to beat a penalty you pay on day one. "Long enough" only means the months left on your current term, because once that term ends you'd get today's market rate anyway, penalty-free.
For the default mortgage with an offer of 4.29% on a new 5-year term, keep the same monthly payment and add up the next five years. Staying costs about $130,200 in interest; that assumes you renew at 4.29% in three years. Breaking costs about $120,200 in interest plus the $9,914 penalty, $300 of fees and about $1,000 of legal and appraisal on the new mortgage. That's about $131,400 in total.
Breaking loses by about $1,100. The break-even new rate is roughly 4.23%. Wait six months until the penalty jumps to the 2-year bracket, and breaking would lose by about $8,700.
Switch the calculator to "I want a lower rate" to run this with your own numbers. It also shows a blend-and-extend estimate. That's where your lender mixes your current rate with today's rate and resets the term, with no penalty. For the default mortgage the time-weighted blend works out to about 4.59%, and it saves only about $700 against staying put.
That's not a fluke. If you expect to renew at today's rates anyway, a fair blend is basically the average of what staying would cost you. Blends make the most sense in two situations. One is when you need more money now, in a blend-and-increase for a renovation or a bigger purchase. The other is when you think rates will be higher by the time your term ends.
Selling? Ways to shrink or skip the penalty
Port the mortgage if you're buying another home. Most lenders let you carry the rate and balance to a new property within a set window, commonly somewhere between 30 and 120 days depending on the lender. If you need more money, the extra is usually blended at today's rate. You'll have to qualify again, so talk to your lender before you list, not after you sell.
Time the completion date. If your term ends within a few months of when you'd like to close, a completion date after maturity makes the penalty disappear completely. If you're sitting just before a jump like the one in the table above, closing a few weeks earlier can save thousands. BC buyers and sellers negotiate completion dates all the time, and this is a perfectly good reason to push for one.
Prepay first. Most mortgages let you prepay 10% to 20% of the original principal once a year without a penalty. Some lenders take any unused allowance off the balance before calculating the penalty, while others want you to actually make the prepayment first. On the default mortgage, prepaying $50,000 first would cut the IRD from $9,914 to about $9,104. That only makes sense if the money is sitting somewhere earning less.
Ask about assumption. Some mortgages can be taken over by a buyer who qualifies with your lender. It's rare in practice, but in a market where your rate is lower than today's, it can be a real selling point.
On the closing side, your lawyer or notary orders a payout statement from your lender and pays the penalty out of the sale proceeds. The net proceeds calculator puts it together with commission, fees and adjustments.
Getting the real number from your lender
The only binding figure is the payout statement your lender issues for a specific date, so ask for one before you commit to anything. Federally regulated lenders are required to explain how they calculate prepayment charges, so also ask for the breakdown. Check four things:
- the posted rate at signing they used
- the term they matched your remaining time to
- the comparison rate
- the balance
If the comparison term looks wrong, question it. Rounding rules differ between lenders, and mistakes do happen.
Also ask about fees on top of the penalty: discharge fees, administration fees and, occasionally, a reinvestment fee. They're usually a few hundred dollars. If you're refinancing rather than selling, ask whether the new lender covers legal and appraisal costs, because that changes the break-even.
Before you sign your next mortgage
The cheapest penalty is the one you plan for. Things worth reading in a commitment letter before you sign:
- Which penalty method applies.
- How long the porting window is, and how blends are priced.
- Your annual prepayment allowance.
- Whether the product only allows you to break the mortgage if you sell. Some low-rate products are built that way.
- Whether it's registered as a collateral charge, which can make switching lenders at renewal more expensive.
If there's a real chance you'll move within five years, a shorter term or a variable rate with a three-month penalty may be worth more than the lowest 5-year fixed.
Mistakes we see with mortgage penalties
Assuming a fixed-rate penalty is three months' interest. Three months is the minimum. The IRD is often higher.
Estimating a big-bank IRD with market rates. Big banks use their posted rates. Plug in the wrong comparison rate and your estimate can be off by thousands in either direction.
Waiting for the penalty to shrink without checking the term brackets. It usually shrinks over time, but not always, and not smoothly.
Accepting the first payout statement without the breakdown. A posted rate or a term match that's slightly off can be worth thousands.
Breaking for a rate that's only a little lower. A 0.5% improvement with three years left often loses money once the penalty and legal costs are in.
Forgetting porting when you're buying and selling. Ask your lender about porting before you list, because the window starts when your sale completes.
Questions people ask us
How is a mortgage penalty calculated in Canada?
For a closed variable-rate mortgage it's usually three months' interest. For a closed fixed-rate mortgage it's the greater of three months' interest and the interest rate differential (IRD). The IRD is your rate minus a comparison rate, times your balance, times the years left in the term. Big banks build the comparison rate from their posted rates, and most monoline lenders use their current actual rates.
Why is my bank's IRD so much higher than online estimates?
Most online calculators compare your rate with today's market rates, but big banks use their own posted rates. Their formula works out to your balance times the gap between the posted rate for your term when you signed and today's posted rate for your remaining term, times the years left. If the bank's posted rate for a shorter term is well below its old 5-year posted rate, the penalty can be much larger than a market-rate estimate.
Is the mortgage penalty ever capped?
Yes, in two cases. Variable-rate mortgages are normally limited to three months' interest. For terms longer than five years, the federal Interest Act lets an individual pay off the mortgage with no more than three months' interest once it's five years old.
Can I avoid the penalty when I sell my home?
Often, yes. You can port the mortgage to your next home within your lender's porting window, set the completion date after your term ends, or, less commonly, have the buyer assume the mortgage. Using your annual prepayment allowance before the payout can also reduce it.
Does paying a lump sum first reduce the penalty?
Usually. The penalty is calculated on the balance, so prepaying within your annual allowance shrinks it proportionally. On a $612,000 balance with a $9,914 IRD, prepaying $50,000 first brings the IRD to about $9,104. Some lenders apply the unused allowance automatically, and others require the payment first.
Is a blend-and-extend better than breaking?
Sometimes, but less often than it sounds. A fair time-weighted blend is roughly the average of your current rate and today's rate, so it only beats staying if rates rise before your term would have ended, or if you need extra money now. Ask the lender how it calculates the blended rate, since some use posted rates that make the blend worse.
Do I pay a penalty if I renew early with my lender?
Not usually in the last few months of your term. Most lenders let you renew without a penalty when you're close to maturity, commonly within about 120 days. Earlier than that, an early renewal is normally treated as a blend, or as breaking the mortgage.
Do variable-rate mortgages ever have an IRD?
Standard variable-rate mortgages from banks and monoline lenders charge three months' interest. A handful of products and lenders work differently, so check the prepayment section of your commitment letter.
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Selling with a penalty on the table?
The completion date, porting and prepayment are all things we can plan around when we list your home. Send your numbers and Dan will look at the timing with you and connect you with a mortgage broker if a port or a refinance makes sense.
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